Tobi Lütke is the co-founder of Shopify, where he has served as the company's CEO since 2008.

Under his leadership, Shopify grew from an online snowboard shop in Ottawa, Canada in 2004 to the world's leading e-commerce platform, powering over 4 million merchants in more than 175 countries. The company went public in 2015 at a $1.27 billion valuation and has since grown to a market cap exceeding $100 billion. As a programmer Tobi has served on the core team of the Ruby on Rails framework and has created many popular open source libraries such as the Typo weblog engine, Liquid and Active Merchant.

We discussed building Shopify over more than 20 years, what it takes to sustain a life’s work, and why founder-led companies can move faster through major technological shifts. We also talked about how AI is reshaping software, entrepreneurship, and team building. Along the way, Tobi shared his views on originality, product craftsmanship, the future of work, and why he believes AI will create far more opportunity than scarcity.

Timestamps:
(0:00) Intro
(0:49) A problem worth solving
(5:58) Building products people love
(10:14) Why originality matters
(11:47) Conformity in Silicon Valley
(15:47) Founder-led companies
(18:44) Shopify’s AI transition
(23:52) Building with urgency
(26:52) AI for small businesses
(35:18) Raising the standard of living
(41:11) Predicting the future with AI
(48:14) Changing perception on talent
(55:34) Reading and curiosity

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Social clips

Building something great

"If you are building the same thing other people build, it can only be similarly good. It can't be actually much better. It can slightly look nicer, but you're bounded a couple percentage points either direction. If you want to build something great or much better, it has to be different. So this has to be your starting position."

The browser

Tobi talks about how people think we can’t do big infrastructure investments like we used to, which is true, but he argues it’s because so many of our most talented people have been creating herculean monuments in software instead of the real world.

“People talk about the incredible infrastructure we used to build in the ‘60s.

How quickly we built subways and now it takes forever and so on. There is an observed degradation of a lot of these kind of projects.

The web browser, Linux, all these kind of things are projects at a scale beyond what the pyramids are.”

Finding a beautiful problem

"One of the joys of life and one of the best things in life is like to find a beautiful problem that might occupy all of your life trying to solve it."

The founder’s presence

"I think in a way, people are somewhat overestimating the founders of companies, and massively underestimating what you can do when the founder is still present and in charge."

Tobi talked about how it's not that founders themselves are some kind of super heroes, but that the *role* of a founder is incredibly important because of what the natural moral authority allows them to do.

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

The Romance of Life’s Work

Jack Altman

I am so excited to be here today with Tobi, the CEO and founder of Shopify. Tobi, before we start, I will say that when I was running my company Lattice, and now, you were one of the founders that I most looked up to. So many things about the way you operate, the way you’ve run your company, the changes you’ve made over time… It’s the top of the top for me, and I feel super lucky to be doing this with you.

Before we get into AI and Shopify, I want to learn a little bit about you and your psychology. You’ve been running Shopify for over 20 years, and from what I see, it seems like you love what you do, and you’re as energized by it as ever. It seems you’re as passionate about the future as ever, and I think that’s really hard.

Having a life’s work is this romantic dream for a lot of people, and I just think it’s very hard to do in practice, because people either fall out of love with their work, they get bored, they get tired. On top of that, being a founder CEO of a big company is not even the easiest type of thing to have as life’s work. My work now as a VC would be much easier to do for 30 years. So I’m interested in how you are able to bring, and seemingly grow, your love for what you’re doing after two decades.

Tobi Lütke

That’s such a wonderful question. Thanks so much for having me on the podcast. I’m super excited we get to do this.

Part of the reason I wanted to start a company is because I found in my teens that I have an extraordinarily hard time learning things where I haven’t basically experienced the problem they solve. The way math was taught in school—here are the steps, here’s the formula—I actually had to go and figure out, “Okay, what exactly is trigonometry useful for?” I started by tricking myself into finding a useful problem that involved trigonometry, after which I felt I could learn it significantly faster than everyone else because I was so motivated.

Karl Popper said one of the joys of life, and one of the best things in life, is to find a beautiful problem that might occupy you all of your life, trying to solve it. And if you’re so unlucky to at some point solve it, it will have plenty of delightful problem children that you can dig into. First of all, I think this is a beautiful way of thinking about life’s work. But it also just works specifically well for me, because I love learning things. I love challenging myself. I find myself, to myself, very interesting. Almost my favorite thing is when I want to do something and I can’t. Because you find the limits, and then you can have this conversation with yourself.

There’s a very simple recipe to success that everyone intuits or knows, but maybe hasn’t spent enough time following through on. Success is really simple. You have to figure out what it costs, and then you have to be willing to pay it. Very rarely does this come in the form of money. It usually comes in the form of time commitment and

Jack Altman

Discomfort.

Tobi Lütke

Discomfort and these kinds of things. So I seek problems. I love computers. To stay with the example of trigonometry, it turns out that the very early video games like Wolfenstein 3D are basically just trigonometry. Once you realize this and play with these things, they become delightful, and you learn the next thing and the next thing.

I wanted to start a company because it was the right time of my life. I had just moved to Canada from Germany. I didn’t have a work permit, so I couldn’t work for anyone. I needed something to do. My wife needed lots of time for her degree. I thought, this is a good time to try it. It’s probably not going to work, but I will learn a lot. This has been a powerful way for me to motivate myself.

Jack Altman

As you think about this, are there things other people can do to more likely stick with and enjoy their life’s work? There are a lot of people who enter a career, a profession, whatever, and they love what they’re doing. As time goes on, barnacles kind of attach to the ship, and cruft builds, and responsibilities grow, and your job evolves, and you end up doing something that you didn’t start doing. People sometimes don’t know how to shed all of that weight. You, as much as probably anybody in the world, have the potential to have all of that around you.

You’re a public company CEO, you’ve got tons of employees, you’ve got all these responsibilities. So it’s possible that you could be encumbered by all these things, but you somehow haven’t been. I’m curious if there are learnings for everybody, no matter how many or few barnacles they have. What can you do to keep loving what you do?

Tobi Lütke

Look, I certainly collected barnacles around certain times in my career too, where I fell into the trap of trying to live up to people’s particular expectations, more in the department of aesthetics. I can only call it an aesthetic because people say things like, “This is what CEOs are like. This is the behavior that a CEO should display. You’re supposed to be a statesman. You should travel and kiss babies and whatnot.” That sounded pretty inefficient from my perspective. But I guess at some point, you just get whittled down and you try all these kinds of things, and my life was miserable too.

Again, this is sort of junk science, a little bit. But what I’m pursuing here is trying to make a beautiful product. I just think we need to create products that are joyful. One of my favorite quotes is by Kathy Sierra: “Don’t make better cameras. Make better photographers.” That’s very deep to my psyche. I feel through beautiful tools you can inspire people to be the best version of themselves. Induce more ambition, induce more skill, or at least induce more ambition for yourself to develop skill beyond what you otherwise would do.

So I want this to exist, and this is just my guiding post here. It throws off all these problem children which are interesting, which then challenge me. You’re talking a little bit about calm. I’m not a terribly calm person either, but I actually don’t want to dial down my calmness. I want to channel it into building something.

I’ve just found that almost all the mediocre products in the world remind me of room temperature. It’s the middle temperature you get when no one really cares. It’s the default setting of a thermostat. Almost every great product is forged in some kind of furnace, some kind of temperature. You’ve got to put in every energy source to produce that kind of heat.

Jack Altman

Do you think that basically has to start from love for the customer? You seem to love your customer.

Tobi Lütke

I don’t know. The greatest gift… people make great products, I think, without that crutch. I think if you have it, it should be an incredible boon.

Jack Altman

You think you can be a great CEO and not love your customer?

Tobi Lütke

It depends on what great CEO… I don’t know. I’m an engineer. I read lots and lots of books about how to make great software. You know what? Many of these books, it’s really funny. When you actually check what was the project that they all worked on when they figured out the design patterns of modern software, it’s like the… Pennsylvania payroll system. It’s just not the most inspiring project. But it turns out, I think work is what you make out of it. If you just default to, “Hey, let’s actually build something that is really meaningful, and we all learn a lot about,” I think it can be done in any realm.

I have a massive benefit, and really one of the greatest things. I tell people this in interviews when people are thinking about coming to Shopify, I point this out. One of the greatest gifts that this company has is that all of our customers are inspiring. They are just remarkable people, doing an incredibly courageous act of starting a company themselves.

The people who flock to come to work for Shopify are people who actually have experience starting a company, or have maybe a family member or at least a deep appreciation, or in fact want to do it in the future.

Jack Altman

People who have been your customers in the past.

Tobi Lütke

In many cases. There’s just something wonderful about… Shopify feels hopefully very fresh as a company. There are no tree rings that you can read about its age. But it has been around. So therefore when we do our annual summit where we all get together in Toronto for a week, there’s going to be people who work at Shopify who weren’t born when I started the company. It’s like, holy hell, has this been a little bit of an institution.

Jack Altman

Especially now, kids are so capable at young ages of being productive.

Tobi Lütke

Absolutely. I think finding the challenges is useful, and tapping into… I found it doesn’t work when I’m trying to be different. But what definitely works is if I take the energy that I have. I have such a deep discontent with bad products and software and so on. I want to solve this problem.

You worked for a long time on HR software. We built HR software inside of Shopify because we can’t find the one that we want to use, and because we see ourselves as tool makers and we solve these types of problems. That also means I’m going to spend half a year learning everything there is about how to build this type of software, so I can work with a small team on the side to make something better.

Jack Altman

And I imagine now you’re able to do so much more of that with AI coding. I love it.

Tobi Lütke

Now it’s crazy.

Jack Altman

One last thing here. You talk about wanting to build great products, but you’ve also spoken about wanting to be original, probably to a degree where I imagine you’d rather be original and good rather than mimicking and great.

Tobi Lütke

100%. In fact, what’s even better is: be different. Because, axiomatically, if you are building the same thing other people build, it can only be similarly good. It can’t actually be much better. It can maybe look slightly nicer, but you’re bounded a couple percentage points in either direction. If you want to build something great or much better, it has to be different.

So this has to be your starting position. If it then converges on the same thing, you have learned something potentially from first principles about why the solution is the one that everyone has converged on. If it gets worse, you actually learned something more important, because now you know, “Hey, your theory here was wrong.” You had an assumption which now has been validated. That learning is the thing from which you’re going to pull so much value in every other realm now, because you have a clearer idea about how things actually work.

I think the null results in science are massively underrated. Ideally then you don’t ship it, because the world needs better, not worse. We have tried to eliminate the term “failure” in Shopify and just call it the successful discovery of something that didn’t work.

Originality and the Valley

Jack Altman

I’m curious if you’ve experienced this. You obviously spend a lot of time in the Bay Area, but I wonder if it’s different for you being in Canada. For me, over the last 13 or 14 years in the Bay Area, I have definitely felt a trend towards herd mentality.

I think there was more originality in 2013 when I moved than there is now. I imagine there was more in 2003. I bet you there was more in 1995. It feels like the trend line is professionalization of the industry and the mindset. I’m curious if you experienced it the same way, and if there are things that people can cultivate to free themselves from the sort of mimicry shackles.

Tobi Lütke

Look, you can’t help but be affected by what you see around you. The best and the worst about the Valley is that everyone’s working on interesting things. But of course, that causes priors to be pre-installed when you start on a project. What’s amazing is when you see children interact with things like AI. They will use it so differently from how you imagine.

It’s worth aspiring to have this free mindset of just trying to take orthodoxy or the obvious path off the table when you start, because the forces of, especially teamwork, will always cause a convergence on the safest path. I think it is an advantage to be outside of the Valley. You just have fewer prearranged priors.

In fact, a really funny effect was when I went to the Valley as a visitor and met with people and took them for coffee. I was trying to figure out how a company should work, and I asked questions. Then I went home, and I had the entire flight to make my notes. I, again, have sort of a bias towards doing it differently. So I take what I hear and try to figure out, “Okay, what would a Shopify version look like, and what would be better of this system?” And make it different, because I felt that’s what you have to do.

But then I realized, only very late in my career, that I never actually got the real story from everyone about how they work internally. I got everyone’s ambition or highlight reel, because that’s what they really share. That plus the ability to then make edits to try to improve it further meant that very often we actually found ourselves doing the things that we thought someone else invented, actually. They might never have implemented it. Maybe that was just the thing that they had the most recent meeting over. So I think that helps a little bit, distance.

Additionally, I should say, I think the world fundamentally, Silicon Valley specifically, has now for a decade and a bit declared war on any kind of distinction. All the talk about diversity was very much about eradicating, kind of, eccentricities and distinction. People are not allowed to be just quirky or funny with off-color humor. I think in the rest of the world that is a little bit more intact, and you just encounter characters. There’s often more appreciation of, “So and so is just a little bit crazy, and you know what? That’s really good.” I think that’s coming back again a bit, and so that’s going to, I think, help a lot.

Jack Altman

There was a big moment where all tech leaders had to go through the sort of political back and forth, and “What are we talking about at work, and are we focused on work, are we focused on other things?” That was not easy for anybody. It wasn’t easy for employees. It was hard for everybody.

Tobi Lütke

It was hard because everyone, literally everyone, wanted to do the right thing, and we generally all agreed even on the identified problems, but just not the solutions that were peddled. They just caused distraction, or an erosion of this thing. A company, I think, should resemble an island of misfit toys much more than a convergence on one preordained truth.

It’s totally worth exploring any alternative on this idea, on the spectrum, and then the results will tell us what works best. I just didn’t like when people were saying, “Hey, we are deciding for you if you can have distinction in this company.” That didn’t work for me.

The AI Mandate

Jack Altman

You’ve gone through another employee mindset change in the last couple of years with AI. From what I recall, you were one of the first CEOs to say, “Everybody, however hard you think you’re adapting, triple it, quadruple it.” I’m curious about that journey. How did it go? Is it still going on? Do you have it where it needs to be? Is there an end to how AI-pilled we should be?

Tobi Lütke

I’m actually really proud of how Shopify is with this. I think this worked extremely well. I made a choice. There’s a type of situation you get in running companies, or any large group, where something becomes clearly true and then you need to make a decision. First of all, do you act on it?

Sometimes people are already feeling bad. In fact, very often people fail the figure-out-what’s-true part. I’m sure BlackBerry thought they were doing really well. I think they had their best year of sales ever the year the iPhone was released, and they thought they were pretty safe.

Jack Altman

Sometimes it’s not that people aren’t smart enough to see it. Sometimes they don’t want to believe it or see it, because the implications are—

Tobi Lütke

They’re not predisposed for it. They maybe, through no fault of their own, create an organization where every layer inside of a conversation prioritizes kind lies over hard truths, often because there’s a culture of everyone being nice to each other.

Jack Altman

There’s also, when you have a big enough organization—you talked about this with how teams make originality difficult—with big groups of people, it’s hard to get everybody to agree to go through an uncomfortable change.

Tobi Lütke

In a way, people are somewhat overestimating the founders of companies, and then they are massively underestimating what you can do when the founder is still present and in charge. It’s not so much about the individual as it is about the piece of infrastructure, the slot of having the founder-slot filled. It’s an odd distinction, but as the founder, you get so much social credit for having started the company. You can just invest this.

Jack Altman

It’s a bank.

Tobi Lütke

It’s like a bank. Every time someone onboards, they hear how the company was created, and that deposits a little bit of credibility, tokens I suppose, into a virtual bank account that is hard to reason about but sort of virtually exists. And then I get to cash that in.

Jack Altman

You can spend it on big, important changes.

Tobi Lütke

And change management, that’s one of the best ways. I can speed up something that would take years of small culture change or internal training with sometimes a memo. I take that really seriously. It’s not the easiest thing. It leads to more work or sometimes unpleasantness. But I find that is what I owe the company. It’s my best way to help the mission.

So when something like the AI thing becomes true, we are saying, “Hey, we have two people. They were both equally good programmers 15 minutes ago, but one of them has completely jumped onto the AI train.” Back when I wrote this, it was really hard to actually get real value out of AI. It was more that the premise of AI was important.

What do we do in performance reviews? The moment we said it… It’s an impact rating. It’s called net impact reviews at Shofy. What’s your net impact on the company and the mission? It’s just very demonstrably true that one of the people was of more impact. The moment that is said, it feels incredibly unkind not to tell people. So, “Hey, let’s write it out and send it to everyone.”

Jack Altman

It’s really unfair if you’re like, “This person has the exoskeleton on, and I’m not going to point out that the exoskeleton’s making him 10 times faster.”

Tobi Lütke

If we act on this thing, we should tell people. And so we did. I included a bunch of other things that are true. I’ve invested lots in making sure that everyone has everything they need. We have an unlimited token policy that I’m sure your brother is thrilled with. We want people to tinker. We want people to play with this. We want people to use it a lot.

It’s super good. It skyrocketed the second this message came along. What Shopify did with this, the speed of diffusion of this tool was remarkable. I’d like to think Shopify is predisposed for this. We have “thriving on change” as one of our core values, and we really mean it.

Token Economics

Jack Altman

It’s good that you talked about net impact. One of the blunter instruments that’s getting used a lot right now is just tracking token consumption. People are like, “I want to see token consumption go up 20% a month.” There are founders who say that. It’s not an obviously terrible idea, in the same way that judging people by lines of code… We could debate, is there anything to it? Probably something, but…

Tobi Lütke

I think it’s fine. At some point we had a leaderboard and so on of token consumption. Of course, that leads immediately to bad effects, so we don’t have that. On Vault, which is our internal system—it’s probably not a term that anyone’s ever heard, but it’s our internal wiki and everything—on your profile, it shows what your token usage is and which percentile you are in your department and group and so on. Just because that’s interesting, because we are tracking it. We have to, because at some point we have to allocate finances to OpEx and whatnot. Therefore, we show it to people so that they know.

Jack Altman

This is probably different numbers because you’re at such a scale, but there are private companies whose token spend as a percentage of revenue is going into pretty wild places right now. I think that’s fine if you’re an earlier stage company and you’re just trying to win the market at all costs. But I am curious how this might play out. I’m sure even you’re seeing token spend at numbers that are probably not a huge deal relative to your revenue, but—

Tobi Lütke

It’s a huge deal compared to revenue. It’s unbelievable.

Jack Altman

It’s a many percentage points kind of thing?

Tobi Lütke

It’s extremely high.

Jack Altman

It’s many tens of percentage points for some of these private companies. So I am a little curious. Right now we’re in that part of the journey with AI coding where it’s just so valuable that people are like, “I have no choice but to spend, because it’s too productive.” I do think we can’t spend 70% of revenue on AI tokens forever and have valuable companies. So how do you think this might go?

Tobi Lütke

It’s complex. I’m very grateful for the stage Shopify’s at, because we are a profitable, public, trusted company. Right now, we really, really like the tokens we are buying. They’re incredibly valuable, and we are doing incredible things with them. It accelerates us in roadmap, and therefore in ambition. I think it just causes so many good things.

Jack Altman

You’re getting leverage on your spend.

Tobi Lütke

It’s a no-brainer. I have a very high opinion of markets. Markets are extremely good. They will figure out what the correct clearing price for these tokens is, and right now there’s few providers and maybe there’ll be more in the future. There’s all sorts of interesting moves around distillation and so on.

I think companies will know how to wield these tools within their budgets. We are actually doing a good deal of this kind of thing as well, but we are still charging ahead because frankly, we like the tokens we are buying. It’s that simple.

Jack Altman

I agree, and my instinct is that it should go down. But there are possible worlds where price goes up.

Tobi Lütke

I agree. Honestly, no one knows. We are 10x-ing the amount of tokens we want every year right now, and I’m sure that’s going to go up. We are 3x-ing the amount of GPUs that we are putting into the world. Those lines are not converging anywhere good at price savings.

Small Teams and Pace

Jack Altman

Given that AI coding is dominating so much, what are the biggest changes to team design? There used to be this EPD triad, and it worked a certain way. There were certain ways that roadmaps were built and reviews happened, and people would go out and talk to the customers and bring that back. What is it now? What’s the most fundamental molecule?

Tobi Lütke

The small team is my bet. The 3-5 people team, which, funnily enough, has always been Shopify’s bias. This is quite gratifying. The reason why we had to very often go past it now is because you just need a lot of specialized skills, at least for certain moments, on the teams.

Your example is a great one: talk to the customers. It’s having someone who actually does the customer research and talks with people. What we always did is, we co-located people from the support org. We routed them all the tickets and put them on the teams, which was an amazing way to do it. Now, the agentic harness around our teams is actually routing really good summarizations of what our customers say automatically back. So that’s now available to everyone, and then everyone can do more. Everyone is a 7 out of 10 on every skill now. That’s really helpful because it allows you to make teams smaller.

The thing that we are working the most and thinking the most around at Shopify… I’m big on pace. Pace has to be induced, otherwise it’s received. Parkinson’s Law is one of my most recommended books, and I have a 1970s, or ‘60s, copy of it that I give to everyone, my executives. I own many of them of the original run, because it’s so meaningful.

Jack Altman

And the law is basically…?

Tobi Lütke

“Work expands to the time allocated to it.” The book is 60 pages and full of these kinds of wisdoms. This is the most important one.

Jack Altman

So one of the most important functions of a leader is to just compress time windows.

Tobi Lütke

Yes. To the plausible. It’s not that you just give any deadline and anything happens. This is why it’s really helpful to be very technical and understand all the tasks and skills. You can ask for something that has a 50th-percentile chance of being the right ship date. Then everyone gets to complain about the crazy founder, which is great. Do whatever venting you want. And then you do, very often, some of the best work of your careers. That’s why people actually flock to these types of companies, because you’re surrounded by the other people that you can go on such crazy journeys with.

The main point here is, I run the company by the six-week review cycle, where we go through all the projects and spend the time with engineers and champions and PMs. That existed to set a pace, a pace floor, of a six-week cycle, which was faster than we instituted it. Because if you don’t do it, you are run by the quarter.

The moment in a PowerPoint… First of all, first flag. Second flag is when someone uses the word H2 or H1, which means first and second half. You’re actually fucked. You actually really have to do something drastic.

Jack Altman

Like, what about Thursday?

Tobi Lütke

Exactly. So you do this, and now I think actually a six-week review is way too limiting. We can do so much more, and we are trying to figure out what is replacing this.

AI for Small Business

Jack Altman

I want to talk about your customers and what AI means for them. We were talking a little bit earlier about how there’s a lot of young people right now who have fears of a permanent underclass. The idea being, you’re just entering the workforce, you don’t have any accumulated skills or credibility yet, and now you’ve got this AI thing, which in some ways is empowering, in some ways seems scary. The net is that there’s become this meme of people being afraid of ascending through the career and financial heights that they want to. You talked about how that’s not necessarily the experience your customers are feeling.

Tobi Lütke

No. Our customers are wonderful, and they are entrepreneurs. They are courageous people who are putting themselves out there. They build businesses. They create employment. In one way, it’s clearly a particular slice of people who would do this. But it’s actually much bigger than people think, first of all. It’s incredibly diverse.

Shopify’s customers go exactly with a population map. It’s great businesses in the smallest communities. It’s point-of-sale stores in the town center of tiny little townships, as well as Alo Yoga. So it’s incredibly different, and it’s cosmopolitan. It’s big business, billion dollars of business. It’s the people who are trying to build a thing in their lunch breaks to make ends meet, or actually because they have an ambition that they want to become entrepreneurs.

So what’s funny with the way the AI conversation is projected—how it’s reported on social media and so on—is it just doesn’t… We can’t access it anywhere we look.

Jack Altman

You’re saying Shopify’s data and experience doesn’t map to this doomer stuff.

Tobi Lütke

It absolutely doesn’t. What we hear from everyone is, “Hey, you guys fix computers.” You techies talked about computers being these incredible things that can do anything, and—

Jack Altman

And it was so complicated.

Tobi Lütke

And then we try this, and I don’t know what… You guys just sound unhinged. And now we can talk to it, and it just does the thing, and it’s incredible. It just works with me. I’ve expanded my business, and I’ve hired all these people now. So it fits into Shopify’s vision because we want lots and lots of small companies. By the way, 60-80%, depending on the country, of people in the economy work for small businesses. They are incredibly precious and important.

Jack Altman

So what should AI mean? If you’re a small business owner, you’re starting a new small company, logically, what should the change be as a result of AI from 2023 versus 2029? What’s the fundamental change?

Tobi Lütke

I think you should sign up for more. You can follow your ambition. Further, if you would poll our customers, I think they believe in a permanent upper class. I think we’re going to get to a point where many, many poor people can self-actualize.

There are two pieces of data that I find incredibly meaningful. One is that every 36 seconds, someone gets their first sale. While we are talking here, think about what that means for how many people just became entrepreneurs. The other is more of a higher-level observation: every single time we ship something where we know it meaningfully changes something about the early journey—the sign-up, the complexities, the questions, the friction in the business—each of them can be best thought of as a hurdle that someone has to jump over.

Every single time we manage to make the hurdle slightly less high because we made something just vastly better—we now let you register domains or easily transfer them, or these days have an AI that can share your browser tab and help you set up GoDaddy—every single time we do this, more actual businesses come out of it, which then provide employment and so on.

People churn out early in the process if something happens that ends up being a governor for them. They null out, they give up, they stop, and then the entire business doesn’t exist. AI is just… There has never, ever been such a thing that can be so supportive of people.

Build Me a Business

Jack Altman

It occurs to me that last year on this podcast, I asked somebody this question. They were a fun person to ask, but you’re probably the number one person in the world to ask this to. It’s something that I’ve been thinking a lot about. What has to be true for us to be in a place where you can prompt, “Build me a business”? How far are we from, “Hey, I made this widget. Please go make me a million dollars. Thanks”?

Tobi Lütke

It’s my favorite idea as a replacement for a Turing test, which we of course sailed past with oddly very little notice.

Jack Altman

It is crazy.

Tobi Lütke

Acting in the real world, starting a business that people find meaningful enough to vote for to the tune of a million dollars, is a wonderful test.

Jack Altman

Marketing it correctly, getting the right sourcing, knowing what things to prioritize, does shipping matter?

Tobi Lütke

I think we are actually getting there. I want to be a supervisor role. You can obviously use Shopify without having products. We help you find manufacturers if that’s what you want. There’s an entire thing called Collective where manufacturers offer their products, which you can then use in your Shopify store. So if your particular skill set is marketing, you can come to Shopify and try your hand at entrepreneurship.

Very often, I think about half of Shopify stores end up being created by people who have done an online store, or at least a business, before. People just try and build things. People should have a product that the world wants. Ideally come up with some unique take on something. There’s so much white space out there.

Jack Altman

But you think AI could do everything else?

Tobi Lütke

I think AI should then do absolutely everything else. In fact, it’s literally what our product’s ambition is—to be maybe the vessel for AI, the brain or the exoskeleton around a model—to basically conspire to do absolutely everything, so that if you show up with a product, you can start a business.

Jack Altman

Just to extend the idea a little bit more—not to go into too crazy of a sci-fi place—is it possible that it could also make the product? Let’s say I wanted to say, “Hey, just go make me a million dollars.”

Tobi Lütke

Anything in digital products—

Jack Altman

Go make me some e-books.

Tobi Lütke

Exactly. Actually books, there’s print on demand for books, for T-shirts. Honestly, additive manufacturing is getting extraordinarily good now. There’s lots and lots of great contract manufacturers for this kind of thing, like CNC and 3D printing. And then we are looking at humanoid robotics, which… There’s a lot of tailwinds to the fact that making the products is going to become much more tractable.

Jack Altman

This will probably be 10 years till I’m asking guests this, but the prompt, “build me a house,” and then the robots just go dig up what they need and put it all together…

Tobi Lütke

I think it’s a world we’re looking at. I don’t see how it couldn’t get there. This is what I dislike about the doomer conversation, or the permanent underclass, or whatever people want to call it.

Jack Altman

How are we not headed to a world of abundance?

Tobi Lütke

Exactly. That then goes into this sort of, “we eliminated all the jobs.” You know how good we are at making up jobs? There are so many examples of things that are just delightful.

I have friends… OpenClaw came around, which we didn’t think we needed, and then it ended up being one of the most compelling things. One thing led to another, and now they have a warehouse full of 3D printers and things. Suddenly you have a J.A.R.V.I.S. to whom you can say, “I would like to do this project, and I bought this crazy 3D scanner from Facebook Marketplace, and I just put it there. I don’t even have the software for it. Just go hack it and figure out how to help me.” It’s just like, “holy crap”.

Jack Altman

I asked Kyle Vogt from Bot Co. I was like, “Will we get to a place where I can just text my robot to order Instacart, get the steak, prepare it, serve it, slice it up, clean it all up?” He’s like, “Yeah, that’ll happen.”

Software’s Hidden Wonders

Jack Altman

At Benchmark, I spend probably three-quarters of my time in software land, but sometimes I do step back and think—and this is maybe a little easier for me when I’m not in San Francisco and I’m touching grass in some other city—”Okay, what’s actually going to raise the standard of living for everybody in the world? We need more and better houses. We need better transportation. We need better food. We need better healthcare. We need good education.” All these things that aren’t software.

Sometimes I think about some alien watching us all and we’re just sitting behind our little boxes typing. Everything’s going better in typing land, and it’s all bopping about in software land. But we really do need it to get into the physical world. Because the standard of living, on some level, is all physical.

Tobi Lütke

Absolutely. It completely is. I think this is actually the missing ingredient. People talk about looking at the incredible infrastructure we used to build in the ‘60s, or just even before that. There’s the Hoover Dam and this kind of stuff. Lots of individual stories about these infrastructure projects, how quickly we built subways, and now it takes forever, and so on. There is an observed degradation of a lot of these projects.

It’s multifactorial. There’s not one reason behind it. But one of them that really is true is because we are building the modern wonders, which are no less impressive, entirely in software. The web browser, Linux, all these kinds of things are projects at a scale beyond what the pyramids are, and easily so. Without compulsion and just by volunteers, sometimes people who have never met each other in the open source world, or at companies building things like Google or the social networks, they’re incredibly, incredibly impressive pieces. If they had physical manifestations—

Jack Altman

They would be the most impressive thing in the world.

Tobi Lütke

You go to something like a refinery and you see the pipes and so on. It’s so impressive. It’s not even in basis points territory in terms of complexity compared to a browser. We just don’t appreciate that.

Jack Altman

I don’t think I appreciate a browser. Is a browser near the top of complexity?

Tobi Lütke

I would put it… it’s one of the wonders of the world, for so many reasons. It could never, ever be introduced today.

Jack Altman

Can you give a small flavor? I’m sure it’s hard to even explain why it’s so complicated, but can you give a flavor of what makes it such an unbelievable thing?

Tobi Lütke

In so many ways. Okay, you go to a website. We don’t trust that website. We just run code. It’s actually your computer in front of you magically reconfiguring itself into someone else’s vision for what should be there, without limits. You download software that then just exists for this one moment to do literally everything.

It’s self-responsible. Shopify is an over $100 billion market cap company hosting millions and millions of businesses that might otherwise not exist, and all of this just happened because anyone can just put a server online, and get an IP address automatically. It’s insane.

Jack Altman

And it all hangs together. It doesn’t come down. Why doesn’t it all crash?

Tobi Lütke

It’s the most reliable thing. No app store on planet Earth would allow the web browser if it were introduced today, if it didn’t exist. No one would allow this because it sounds like an insane pitch, yet it exists and we just don’t think about it.

The font rendering alone is one of the most complex things. The font rendering alone is a Turing-complete system, just because we want to be able to read text slightly better than our displays can allow them. It just keeps going and going. I can go full nerd-core on this, but the larger point is the following.

We have not stopped, as humanity, building incredibly impressive infrastructure. What has changed is the infrastructure that needed building over the last 30 years. The reason why other infrastructure didn’t happen is because the people who could—

Jack Altman

So much went into this.

Tobi Lütke

What planet Earth needed from us was a digital infrastructure.

Jack Altman

But imagine if all those people worked on robotics.

Tobi Lütke

And this is happening now. We are—

Jack Altman

This is happening with AI.

Tobi Lütke

It is happening with AI. All the software we built was a bootstrapper for AI. Software becomes, due to this achievement, something that can become personal again. Now you can have basically a web browser, but the websites don’t even need to exist for what you would like to see.

Jack Altman

It’s so true when you say it like that. The easiest example to identify with for most of us is probably an iPhone. We’ve probably all just, randomly one day, looked at our iPhone and been like, “How is this possible? How does this thing exist?” It’s crazy.

Tobi Lütke

As beautiful as it is, and as reliable as it is, and as personal as it is. The iPhone is a lucky exception in that you can appreciate it as a physical thing. Everyone is right when they say, “Why is everything just standing still or not getting better around me?” Because from our ability to observe it, all the infrastructure is digital. But we are almost done with this. We are at the end of the opening chapters. Now I think we will see vastly more impact in the real world.

Jack Altman

We put all of our energy against this thing because it was the foundation, but now all these people will, in some sense, be free to not write software.

Tobi Lütke

That’s exactly right. So I think we will have a huge influx of the brightest and most creative and driven people to make things which are going to be much easier to relate to and have much more direct impact on people’s lives.

Reading the Future

Jack Altman

How important is it for you, as CEO of Shopify, to have an opinion on where AI will be in two years? There’s one worldview you could take, which is, “This is so unpredictable. I’m going to take it as it comes. I’m going to try to know six months ahead, but I’m going to do what I can do.”

And then there would be another which is, “Now I’m actually going to spend a lot of time with the labs, and I’m going to try to have an understanding of two, three years out and try to care about the farthest out I can see.” What do you think is the right position?

Tobi Lütke

Yeah, if my friends would listen to this question, they would laugh, just because it’s my predominant obsession. I try to have as many data points on as many people, which I can then try to match to the right superlinear or sublinear curves, and just figure out how they all connect and what therefore will happen in the future. To me it’s the most fun game in the world: to have a pretty clear-eyed view of what the future is like.

Jack Altman

What in particular are you trying to figure out?

Tobi Lütke

The AI memo is a good example. It was probably slightly too early to write it, but if you read it now, it says nothing that would be surprising. So being able to give my company the gift of a head start, that’s what we are trying to do. I can tell everyone something that is not quite clearly true now about the importance of these systems. We can rebuild our systems to really reinforce this and support everyone in their own tinkering and exploration. That means our view of the future is going to be more accurate, and so will the things we are building. Because you’re always building for a future point.

Software is getting faster to build, but you still have to aim at a future point of value. It’s not our customers’ job to tell us what they need. It’s our customers’ job to tell us what the problems are that they’re experiencing, and we fall in love with those problems, adopt them as our own, and just solve them in an ideal way. But that’s our job, to figure out what the ideal way is. That comes into contact with the customers, and they give us further feedback for refinement. But in my mind, it’s a complete abdication to just build what your customers are asking for. It’s an abdication of product responsibility.

So it’s hugely important. I try to live in everyone else’s relative future, so I do a lot of it. While it’s incredibly fun and helpful to talk with the labs, and sometimes there’s really important information you can get from this, what I found, and we touched on it earlier, is that one of my favorite things, especially for product teams and engineering, is to hire people who actually know Shopify really well from outside. Merchants make some of my best product managers, because they actually understand what the software feels like when it’s being used.

It’s the same with people who build apps on the Shopify platform, having them come to Shopify to help make the app platform better. I actually don’t even think being in a lab is the best position. It’s actually using everything and paying a lot of attention to how everyone else uses the gifts that the labs release, and then being in the conversation, which usually happens on X, about what everyone’s figuring out. Building something and seeing everyone find it useful, I think this sort of learning by doing is actually how to get the clearest view of how everything works.

Jack Altman

Does that give you a clear view on the present, or does it also give you a clear view on what’s coming in a year or two?

Tobi Lütke

If you do it over a while, you get—

Jack Altman

You see a trajectory.

Tobi Lütke

You get trajectories, and the trajectories have a point. If you are exactly on the state-of-the-art meta of the best thought on stuff, and you have other data points, the future gets very simple to predict. Now it’s the hardest time ever to do it because right now the time horizons are so short.

I did this very same thing throughout my entire life. It used to be that the future was absolutely trivial to predict. You just looked at the first couple numbers on mobile browser usage, and you knew what was happening on a cell phone and that we needed to make mobile websites. That just sounds insane now. But at some point, people didn’t believe that.

Jack Altman

Are there parts of AI right now that you think are under-hyped in terms of capabilities? And are there parts that you think are over-hyped?

Tobi Lütke

Obviously, the labs really care about programming because that’s the problem they need to solve for themselves. Again, it’s always easier to build for various reasons. Opus is unbelievably good at programming. Right now it’s easy to go from that and assume it’s equally competent in everything else. Quite often it isn’t.

If you want to discuss how to do a public talk or something, it just doesn’t have great theoretical rooting of this and why. It knows about all the different ways to construct tension and so on, but it’s not able to then look at something and make it meaningfully better. Whereas even with an incredibly well-optimized piece of code, it often finds abilities to do better.

What is happening a lot is that we are bringing more types of problems into the domain of programming, which is really what OpenClaw is, if you think about it. Make it a file system, give it tools like a programmer uses, make a couple of files, and in the files just tell it the soul and the memory and so on. Then it uses the normal programming tools to interrogate this. Because it stays a little bit in the domain of programming, it now actually is remarkably better at this other out-of-domain thing, which is really funny.

I think we should assume though that we are going through the entire radial chart of things that are valuable and bringing them to the same point we’ve honed programming to. So there’s a bit of over-hype in having to work so hard on bringing things into the programming domain, because all of it is just going to get much, much more natural and easier as the models appear.

Where it’s under-hyped is just in deployment in companies, and what role it should play. There’s a huge—

Jack Altman

No one’s using it enough.

Tobi Lütke

No one’s using it enough. Partly because everyone just starts with, “Hey, help me do the things that I’ve been doing all along slightly better”, or actually vastly better, which is valuable, obviously.

But if you do the more first-principles thing… If AI had been around ever since Alan Turing first wrote about it and had just worked, and we’d be in the presence of these superintelligences all the time, and we would just invent the job we are thinking about right now, how would we do it? Just invert the whole thing.

It’s so much more fun to have those conversations. I’m exceptionally excited about this because I think it will create the environments that the most creative and best people will really appreciate, because everything around them happens at the speed that they want to work. That has never been true for any company that required some bureaucracy for doing stuff.

Talent and Going Public

Jack Altman

On the point of talent, have you changed anything about the types of people you’re looking for, pre and post-AI? Are the people who were successful before still the most successful people, or is there any attribute that you are scanning for in a different weighting than you used to?

Tobi Lütke

It’s fascinating. This is actually really changing all the time, and I’ve had to change my mind a couple of times. I think the best distinction point is… Shopify is 20 years old. The average age at Shopify is somewhere in the late 30s, which I think is still pretty good.

This is one thing you have to look out for as a company. There are some companies which just age themselves 12 months a year, for various reasons. That’s probably a problem at some point when a lot of new things happen. So massively restarting the internship program has been really helpful. We take 1,000 interns a year. We’re close to Waterloo and work with Waterloo, so it’s great. Making sure that the interns are not just the students now, but also the teachers, because they are just so AI-native that it was really helpful.

It’s also interesting because initially I had the thought that… There’s fluid intelligence and crystallized intelligence, basically knowledge and curiosity-driven willingness to learn. Often early in your career you have no knowledge, therefore you’re all fluid. And then AI was super new. The first people would just flock to it and immediately got value out of it, and that was super exciting. I had the thought that maybe that really tilts in their direction.

But then as the system got firmed up around the coding harnesses, Claude Code, Pi, and all these kinds of things. Programming is not so much the task of typing. It’s really understanding the problem deeply. I think every programmer in the world massively underestimates how much they’re doing when steering an AI right now, and how much of that was really them being creative. It’s uniquely theirs what they’re coming up with. They’ve seen the movie before. You can spot the AI going the wrong path, and one or two words can completely change everything.

That’s a very long answer to say, I kind of don’t know, but I actually just think good people are good. There’s a bit of variance in how quickly people adopted the tools, but once they did, everyone just falls back onto their level.

Jack Altman

That’s the “what do you like” side of the question. To flip it to what candidates are like, have you felt any change in competing for talent in this market? You’ve got a lot of variables at play here. You’re public. Many of your competing-for-talent companies are probably private. You’re in Canada, not in Silicon Valley. There are all these different factors, but I’m curious how the AI wave changes what you do to attract and retain the very best people?

Tobi Lütke

I think the best way to deal with recruiting is to build a company worth working for, for the best. People are thinking about it too much as selling and not enough as marketing, or at least just information.

Jack Altman

Yeah. It’s like, “How do I look super healthy? You could use this angle, you could turn to this angle, you could do…” Or you could also just try to be healthy.

Tobi Lütke

Exactly. Things are just simpler sometimes than they seem.

Jack Altman

So what goes into that then? Obviously there’s being a good business, but—

Tobi Lütke

Just don’t mire people in bureaucracy. Give people the space to be creative, allow them to fall in love with the mission, have them understand what problems people care about and what impact the work has.

Shopify has a lot of intrinsic advantages here, but the best way to attract talent is to make it so that when people try on the idea of maybe coming to Shopify, they come by, they meet everyone they will work with, and also the really impressive people that they will work with together.

Jack Altman

As a CEO of a public company for, I think, over 10 years, how do you feel about companies being private for so long? Obviously it’s more possible than ever. Venture markets are a lot bigger than they were back when you were going public. What do you think?

Tobi Lütke

I find it a little bit sad. I totally understand why the individual companies do it. I just find it, man, I’m so glad that so many people end up—

Jack Altman

Buying Shopify stock.

Tobi Lütke

Buying Shopify early.

Jack Altman

It’s gone well for them. A lot of retail investors have done really well with it.

Tobi Lütke

Exactly. It’s remarkable. I can go basically anywhere and meet people, and they tell me that they bought some shares at some point and it was really important to them. It’s cool. I want people to make money with Shopify because I’m very much not… The sort of “one share, one vote” kind of thing, the influence part I’m like, “Totally what the fuck is that all about? Just like founder shares, let’s go.” But I think they are tickets to participate in something you believe in.

My view of money is, it’s how you vote for the world you want. When you buy a product, you’re voting for that product and everything that caused that product to exist. That works with shares too. If you want to hop on a company because it does things that you agree with, then you can buy them, and you can go to another company if someone else captures your imagination better. I think that’s a wonderful institution.

I just also feel like it came from a meme. Because I have lived the other side of this… It was kind of easy to go public, wasn’t it?

Jack Altman

You’re saying the “stay private is much better” came from a meme? The argument is you don’t have the quarterly public scrutiny. Not everybody can see all your financials all the time. Your employees aren’t seeing their stock move up and down.

Tobi Lütke

Fair enough. I just never really saw these things as bad things. They induce a diligence and a data-drivenness and a set of responsibilities which I think are worth having, because you’re responsible for thousands of people’s jobs and an important product.

Jack Altman

What are the other benefits? You just shared one about the joy of a lot of people getting to share in your success.

Tobi Lütke

It helped us in a way that maybe is not always the case. Especially as a Canadian company listing in New York, we were just very small. When Shopify IPO’d, it was like a $1.5 billion valuation.

Jack Altman

So you’ve had 100x in the public markets.

Tobi Lütke

Yeah, and that’s cool. Therefore I find lots of people who tell me that was a good investment for them. It gave us legitimacy. We never wanted to go upmarket, but we always wanted to have a product that can work well for people at all parts of the scale. That just sounds like words. It’s about 100x harder from building a product. Building a product that actually scales across the entire thing is insanely difficult to do and has been one of our most fun challenges to pursue.

Bigger customers were just like, “Yeah, you’re a public company. That’s cool.” That’s different. Then frankly, there’s really, really good people who would only work for a public company, so that’s also helpful.

On Books

Jack Altman

Makes sense. My last question. I know you have at least been a big reader. Do you still have time to read a lot? You got any books I should read?

Tobi Lütke

There’s so many books I love. I’m a huge fan of short, incredible books like Parkinson’s Law and Lessons of History. When people distill all of their knowledge into under 100 pages, I think that’s great.

I recently read a really good book called What Is Intelligence? It re-explains basically all of biology from a perspective of how important prediction is and how it probably emerged just in a sequence. It felt existentially profound in a way that I don’t quite know if that was… Because it felt like all this part was just to support an argument later that wasn’t actually that important to make, I think. So this is interesting.

Jack Altman

I think others have felt this too, but I’ve been struggling more to read. Partially it’s a stage of life thing, but partially I think the internet is making my brain loops too short, and partially I think I am in a head space where I want every minute to be productive. So it’s hard for me to read a book for joy, and I need to figure out how to get through that. But you seem to have figured out how to—

Tobi Lütke

It’s the job of an author to make you keep reading. This is an important mental switch. If you read a book and it just doesn’t capture you, that’s not because you’re broken. It’s because the author didn’t manage to do the thing that they set out to do.

I have an advantage—disadvantage? I guess advantage at this point—of being out of cycle with my wife, who is also a light sleeper. I just go to bed when she wants, which is way too early. Usually like at 10:00 or something crazy. I’m a night owl. I don’t need a lot of sleep, luckily. So I have hours of reading time, and the Kindle is not that bright, doesn’t wake her up. Therefore I have a couple hours of reading time.

Jack Altman

You’re not doom scrolling on Twitter like the rest of us.

Tobi Lütke

I really am a huge fan of the Kindle, not because it’s great, but because it isn’t. It’s such a limited but actually single-purpose device. I find that wonderful. I find books just to be so remarkable.

Jack Altman

They’re like going to the gym. When you read a book, I’m like, “I got to be reading more books.” Life just pulls us all.

Tobi Lütke

It’s best to have some ritual or some dedicated time for it. If you can pull it off, that’s just great and it is books for me.

Jack Altman

Tobi, this was an absolute pleasure. Thank you for making time for this.

Tobi Lütke

This was really fun. Thanks so much for having me.

Kevin Hartz and Bennett Siegel are co-founders and GPs at A*, a five year old early-stage venture capital firm with $1B in AUM. A* has invested in companies like Notion, Cape, Whop, Paraform, Simile, Krea, Mercor, Watney Robotics, Andera and others.

Kevin is also the co-founder of Eventbrite (NYSE: EB) and co-founder and board member of Xoom, an online money transfer service that IPO’d in 2013 and later acquired by PayPal for $1.1B. Notable investments, primarily at the seed/early stages, include PayPal, Airbnb, Pinterest, Reddit, Anduril, and Palantir among others. Bennett was previously a partner at Coatue building out their venture capital business where he invested in earliest financing rounds for Ramp and Decagon, among other investments.

We discussed how AI is reshaping venture capital, software, and startup building – from the rise of younger founders and AI researcher-led companies to the growing pressure on traditional software businesses. We also covered the changing economics of seed investing, the influx of mega funds into early-stage venture, AI rollups, robotics, and why this may become the biggest technology boom yet.

Timestamps:
(0:00) Intro
(0:25) The A* Capital story
(1:16) Why big funds went into seed
(7:50) The mother of all bubbles
(10:46) Why founders are getting younger
(13:00) Mapping talent, not markets
(16:31) The rise of AI researcher founders
(19:16) Why seed investing is so hard
(22:54) Concentration and venture returns
(27:34) The AI rollup craze
(31:15) AI vs traditional software
(33:15) Robotics and the future of AI
(35:39) What’s next for A* Capital

Links:
https://x.com/kevinhartz
https://x.com/BennettSiegel
https://x.com/jaltma

Watch on YouTube; Listen on Apple Podcasts or Spotify

Subscribe now

Social clips

A new crop of founders: researchers

One of the big changes in venture that Bennett and Kevin discussed is needing to understand a new type of founder -- researchers, which historically didn't always make for great founders but are obviously a huge part of the AI era.

"You have to listen so carefully...every word from a great founder will have so much meaning and intention about what they're gonna build."

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

Inside A*

Jack Altman

I’m really excited to be here with Kevin and Bennett from A*. Thanks for doing this with me.

Bennett Siegel

Thanks for having us.

Kevin Hartz

Thank you.

Jack Altman

I want to start with just the quick history on A*, how the firm came to be, how you guys started working together. Then I want to go into seed investing. Can you give us the quick backstory on A*?

Kevin Hartz

We first met through Ramp, and that was at the seed stage. Eric and the team were raising and I participated as an angel. This is pre-A*. Bennett was at Coatue. That’s where we first interacted.

Bennett Siegel

We started A* five years ago now with our third partner, Gautam. The idea was to build a new kind of venture capital firm that could focus on partnership with founders at the earliest stages and work closely with them as they continue to grow and mature. Five years in now, we just closed our third fund. We’re at a billion of AUM, and the idea is to bring something different to the early stage market.

Venture Arrogance and Big Funds at Seed

Jack Altman

A year ago, I started this podcast, and one of my first guests was Josh Kopelman, founder of First Round, an amazing seed stage firm. One of the things he was talking about was the venture arrogance score, that really stuck. What he was saying was, bigger funds are super arrogant to think that they can have big returns, directionally speaking, because you own X percent of a company. How big can the companies be? What return are you getting?

That argument really resonated. It’s funny now to me, looking back 10, 11 months later. A lot has happened. There are more of these five to $15 billion funds than ever. The rounds are more expensive than ever. There are these three-plus huge looming IPOs, which kind of gives credence to the big fund. Some of these big funds are doing really well actually.

So there’s this whole situation. I’d be curious to hear your guys’ take on the landscape and being a smallish seed-focused firm relative to this market moment.

Kevin Hartz

Look, you always have to play the hand you’re dealt, and we live in this world of giants. It’s true about Anthropic, SpaceX, and OpenAI and these massive returning large-capital-needing companies. But at the same time, big funds, big fees for those partnerships. We stayed small so we can be agile. It’s like the equivalent of when you’re the CEO of a new startup and you don’t take a salary.

Jack Altman

Do you think if the fees were capped—instead of 2 and 20, if after like a billion there were no more fees—VCs would behave way differently?

Kevin Hartz

Absolutely. Without a doubt. I’ve seen funds go from small to large and the behavior absolutely changes. No names, no name drops here, but it happens that way. There’s so much in this really exciting upswing of the market. LPs want to get in, and they’re not able to negotiate those fees down.

Bennett Siegel

If you think about it, the fees haven’t changed as the asset class has changed. Look at long-only oriented funds in the public markets. They charge 1%, they charge 10% carry over a hurdle. At this point, these growth funds that are raising $5-9 billion, they’re investing in what would’ve been public companies a decade ago, and they’re essentially indexing the asset class. Why should you make 2 and 20 for that?

We built A* to be aligned with founders. We want to partner early, we want to take risks, we want to work hand in hand with them. It’s a different craft, but our incentives are aligned. We only win as they win. That’s different than I think the prevailing view in the bigger firms.

Jack Altman

You do need to do well enough as a big firm. You need to cross some threshold so you can keep raising your funds. But you think about a $5B or $10 billion fund, and you think about them playing at seed. I was joking with you before we started that your guys’ fund is like $450M or whatever. Some of these funds, if they raised $8.3B versus $8.8B, none of us would clock it. But that’s a whole extra A*.

They can use that going into seed rounds, and their incentives there are different. So I’m curious. What is their strategy? What is a $10 billion fund doing at seed, and why are they doing it?

Kevin Hartz

I like any unit of measurement that is an A* unit of measurement. Maybe it’d be adopted as a practice.

Jack Altman

We’ll all talk about A*s going forward.

Bennett Siegel

There are two facets. We used to joke at Coatue that there were two ways to make a billion dollars. One way was the Benchmark way. You find an incredible Series A, you lead it, you partner, you have a generational public outcome, and you earn your percentage of the company. That’s hard and takes a long time.

Kevin Hartz

Or the A* way, in addition to Benchmark.

Bennett Siegel

In addition to Benchmark. Or you put a billion dollars into a company and you double your money as it goes public in three years. That also earns you a billion dollars to distribute carry. One is a lot easier than the other and more repeatable?

So incentives have shifted in a way that reflects the market reality. Seed specifically—we see this with a lot of our friends at multi-stage firms—it’s option value. Let me build a basket of companies with a certain amount of ownership and see what pops. If it pops, I could double and triple and quadruple down. I don’t think founders want to be thought of as an option, as part of a basket.

Jack Altman

I obviously want to believe that too. But can I give you the counter there? I’m curious how you manage it in the market? The counter is basically, look, I also don’t want to be thought of as an option, but $10M at a $100M sounds a lot better than $3M at $30M. I have $7 million extra dollars to go hire a team, run my experiments, see where I’m at. That is the discrepancy that’s been created. So how do you navigate that as a seed specialist?

Kevin Hartz

We are a boutique firm, so we can’t be everywhere and we can’t cover every scenario. We find enough founders that are looking for a great partner to work with and to go through this battle. We’ve been through it before. I’ve been involved in founding a couple companies from inception all the way through IPO and beyond.

We can’t win them all. I would also say, the challenge of this era—and maybe I’m biased by this—is that the amount of capital out in the market does mean that you don’t have as much help in oversight. I’ve seen more rookie mistakes being made in this environment that just shouldn’t have happened.

Jack Altman

It’s funny, there’s a class of things that is very hard to sell in a fundraising process, in the quadrant of true/false, easy to sell/hard to sell. There is this set of things like what you’re talking about—help during the hard times—which I think is very hard. It’s real, but it’s very hard to communicate in a round process in a market moment like this. When markets are hard, maybe that resonates more. But when markets are really frothy, as it is in many ways right now, it’s just tough. It’s an interesting time as a seed specialist.

Bennett Siegel

We’ve seen this before. In 2021, that was the era where Tiger was offering every software company the lowest dilution, highest valuation offer. Solo GPs were promising very little help, but they were hitting the highest price bids at Series A. Most of those companies and most of those outcomes did not work.

Jack Altman

The pitch was, “We’ll be uninvolved.”

Bennett Siegel

Yes.

Jack Altman

The sell was, “We won’t talk to you.”

Bennett Siegel

A hundred percent. Building a company is a marathon, not a sprint. A low-dilution lead offer is relevant for founders. When we compete and when we win on deals, we’re not trying to get a value deal. We are also offering what we think is a low-dilution competitive offer, and support and partnership and things that founders should care about.

The Mother of All Bubbles

Jack Altman

I know you start at seed, but you do seed, A, and B. So you’re very in tune with all of those market stages. What have you seen over the last six or 12 months in terms of how these rounds are happening in succession, where valuations are going, how dilution is happening across them? What are the trends along those rounds?

Kevin Hartz

I’d like to think that we’re not top ticking, we’re not there yet, but we’re headed to the mother of all bubbles. A historic precedent. If you think of the eighties and the personal computer and what came out of that era, or the nineties and the internet, and the two thousands and mobile… AI and the platform and the boom that we’re seeing right now is immensely exciting. We have such a global audience to reach. I think we’re going to have a few years of this continuing to grow.

But unfortunately, as in capitalism, it always ends badly. I don’t mean end. We all know that after 2000, Amazon and Google and so on came out of the internet bubble. Now they’re multi-trillion dollar companies. Netflix and PayPal and so on. It’s an exciting time, but yes, capitalism is like a pendulum. It’s either too far one direction or too far the other.

Jack Altman

It’s funny on the bubble topic. I have a friend at a growth stage firm, and he and I keep track of all of the signs that we might be in a bubble. It’s things like how quickly the rounds are coming in rapid succession, what are the degenerate gambling behaviors we’re seeing from people in and out of venture, what’s happening with SPVs. You go through this list, and a lot of the signs are there.

The counter, which is a strong counter, is that there are a lot of extremely interesting companies. There are a lot of companies getting to $100 million of revenue with happy customers and crazy new technology, faster than ever. I’m guessing that you’re probably feeling a mix of, “Whoa, this looks like a bubble, but these companies look so interesting.”

Bennett Siegel

We’re optimists by nature. That’s why we’re venture capitalists. In any platform shift, you’re going to have some incredible companies that come out of this vintage. In fact, they’re probably going to be larger than anything we’ve ever seen. But you’re also going to have a lot of companies that aren’t going to go the distance. We all see it in our portfolios. Who’s building durable revenue streams? Who’s building moats around their business versus what the labs are offering?

If we’re doing our jobs correctly, we’re going to find these handful of companies that matter. But there’s going to be carnage in their wake, and not every company is going to make it. That’s true in every prior cycle.

The other thing I would say is, what’s changed since we started A*? Seeds used to be $20M to $30M posts. They’re now $40M to $50M. A great Series A used to be $100M post. Now they’re happening at $250M. Series Bs used to happen with real traction at a few-hundred-million-dollars valuation. They’re $500 million, $1 billion. Everything has changed, particularly as large funds have gone earlier. This will end absolutely fine for the best companies that will continue to grow and mature, but it will also be more challenging for founders that struggle to raise above their pref stack and don’t go the distance.

Founder Attributes in the AI Era

Jack Altman

So you guys are investing at the earliest stages where you’re basically just looking at teams. There’s an idea, but probably not much of a product, and the idea is probably squishy. You’ve got this backdrop where this is both the most exciting time ever and a scary time in certain ways as an investor. So what are the founder attributes that you look for right now? If there’s any contrast to what you looked at in the pre-AI cycle, I’d be interested in hearing that too.

Kevin Hartz

There’s a curious movement around age, in that founders are getting younger. I guess they’re not aging in reverse, but—

Jack Altman

No, it’s wild.

Kevin Hartz

They’re getting into—

Jack Altman

Just look at a YC batch. People in their teens.

Kevin Hartz

I bet they have great data on that.

Jack Altman

Yeah, it’s going young, for sure.

Kevin Hartz

It’s interesting. In the late seventies when Steve Jobs founded Apple and Bill Gates founded Microsoft, they were 19. Then you fast forward and there’s some other examples along the way. Then you had Zuck, and then you really had this accelerate. You had Peter Thiel and Luke Nosek devise Thiel Fellows in 2010. That was very prescient.

Jack Altman

It’s been incredibly successful.

Kevin Hartz

Yes, and it’s a nonprofit.

Jack Altman

It was unbelievable.

Kevin Hartz

It was very prescient of what was coming, which is this lowering of the age and dropping out.

Jack Altman

But it wasn’t quite like this right before AI.

Bennett Siegel

It was never like this before. There always were young founders building incredible businesses. But you and I have spoken about this. In this paradigm shift, who cares if you know how to build a SaaS product, or sell a SaaS product, or hire a traditional enterprise go-to-market team? This is new for everyone. We’re all rewriting the rules as we build these companies in real time. Young founders are situated very well because they’re the first adopters of this technology.

So it’s why you’re still seeing very large companies built by people under the age of 25 or 30 at an unprecedented rate. For us in practice, that means more and more of our founders are skewing younger and younger.

Kevin Hartz

Just the other day I was speaking to a founder going over some documents, and he said he would run things by his lawyer. I said, “Isn’t your lawyer your mother?” He’s a teenage founder. And he sheepishly said, “Yes, she’s a good lawyer by the way.”

Jack Altman

That’s good. What else besides age? We were talking about durability and the world is changing. What other attributes, aside from just young founders, have certain advantages now?

Mapping Talent

Bennett Siegel

We generally map talent, not markets. To be a seed-stage investor, you have to be founder-centric, but you also have to recognize what’s happening around you. The labs are not just infrastructure companies now. They are legitimate competitors at the application layer, which happens to be where most seed-stage companies are building. That’s where you raise an initial round and launch a business. Obviously there’s codegen, which is the central battleground, but it’s going to proliferate to every part of knowledge work and every part of the enterprise.

We do try to think about where there’s white space to build, or where you can have enough of a runway to finally build differentiation. Nobody is differentiated at seed. This whole idea of, what makes this different? Why couldn’t your competitor do this? Every seed-stage company could obviously be disrupted or built by an incumbent. We need to figure out where there’s at least enough white space, enough of a runway, that you can start to achieve liftoff.

Jack Altman

When you say you map talent, what does that look like in practice? What does a day look like? Is it just reaching out to interesting people in certain networks? Are you tracking people that you’ve already known? What does it actually tactically mean to map talent?

Kevin Hartz

It’s a lot like mining, where you’re in a vein of gold, you’ve found an area, but that exhausts itself and you’ve got to find new talent and new areas. I don’t know if that’s a good analogy, mining, but things are constantly switching. The founders are always the same. They’re always those that have had to overcome some kind of obstacles and still achieve at a very young age, and be able to recognize the signs.

We’ve gone through this big phase of IOI and all the coding competitions and things of that nature as a measurement for teens that are achieving on that side. So you’re looking for these types of attributes, but the reality is—

Jack Altman

Jane Street, I feel like, has been a really good one recently. There’s been more interest from ex-Jane Street people to be in startups. Obviously it’s a very talented group.

Bennett Siegel

This isn’t some unique insight, but high-quality people want to hang out with high-quality people. So when you go to the top universities, when you go to the accelerator programs, when you go to companies— the most talent-dense nodes work very closely together. As you start to work with founders in those nodes, you naturally meet their friends who go on to start great companies.

I also think, as you see people leave companies, you see certain patterns. Certain companies breed better founders than others. Airbnb, Stripe—so many of these companies are magical businesses. They worked, and not to say there wasn’t hardship in the early days, but when they took off, they really took off. So it doesn’t necessarily breed as many founders that run through walls to start companies.

Palantir is an example. Everyone’s a mini-CEO. Everyone had to build and launch a product and find product-market fit. It’s why I think Palantir has the highest per capita rate of unicorn founders of any company. Part of what we need to do is continue to find those areas where the next founders come out of.

Kevin Hartz

We love those Palantir founders.

Jack Altman

They’re fantastic.

Kevin Hartz

You can’t get enough. They’re so good. Whatever they feed them over there is really working.

Jack Altman

I also think probably with Palantir there’s a certain non-consensus mindset implied simply by wanting to work at Palantir. At least, that was true at a certain time. Now it’s maybe become a bit more mainstream. But I think for people who worked at Palantir and Anduril at a time before it was popular, on the contrary it was something that you had to defend. That takes a certain mindset that is related to being a founder.

Researcher-Founders

Bennett Siegel

One thing we didn’t talk about: there’s a whole new crop of founders that never existed, at least in my time of doing venture. It’s the researchers. It’s folks that are leaving labs or PhD programs that are raising massive quantums of capital.

Jack Altman

By the way, it used to be a big anti-pattern. What, like, researchers?

Kevin Hartz

Yeah. That’s hard. You’re totally right. Researchers tend to have high intellect, but—

Jack Altman

Academic.

Kevin Hartz

Not as commercial.

Jack Altman

But now obviously there’s all these counterexamples for maybe the first time. I’m sure there were examples in the past, but that’s a whole new thing that people have to grapple with. It’s very hard.

Kevin Hartz

It is. I think that’s where, when you’re spending time with the founder and getting to know them, if they can really articulate what they’re doing, you have to listen so carefully. A great founder will have every word very much have great meaning and intention about what they’re going to build.

Jack Altman

You’re saying there can be cues with the language someone’s using, of where their head’s at.

Kevin Hartz

Yes and how they prepare and how they’re thinking about the business. Sequoia had backed my previous two companies, and they were always sticklers on how you presented and how you showed up at the same time.

Meeting Founders: Cold vs. Prior Relationship

Jack Altman

Do you guys find that meeting founders in a round versus getting to know them before their fundraising is some huge difference? Do you have good examples of success with either? Do you prefer one over the other?

Bennett Siegel

The Decagon team’s a great example. Kevin, why don’t you talk about the history with Ashwin? But I think the prior history informed how we thought about this company.

Kevin Hartz

I had been an angel in a company that Ashwin had founded called Helia. Russell Kaplan and Daniel Barrios were in that too. Russell’s now the president of Cognition, and Daniel’s over at Meta. That company didn’t make it, but I stayed close and was always a big fan of that trio. When Ashwin went off and met up with Jesse to start Decagon, it was kind of a no-brainer to get involved in the seed round there.

Bennett Siegel

The funny thing about Decagon, there wasn’t really an idea. They had this insight.

Jack Altman

You knew the team was great.

Bennett Siegel

We knew the team was great. We knew there was white space in building on top of the foundational models in a moment in time when no one had really commercialized different enterprise applications. You had the history of the team to say, “Wait a second, we understand why their prior companies were a modest success, but why one plus one equaled more than two in this situation.” That’s an easier bet to take in some ways when you have that history.

The flip side is, there are founders we can meet during a process where we try and build as much rapport and relationship as we can. We try and understand them as people. We have to try and understand the opportunity, and those have worked for us well. But it’s a shotgun marriage. You need to move faster many times with less information.

Jack Altman

Especially in a market like right now. Sometimes you meet them, you have three days or something like that, or less.

Bennett Siegel

Three days. I would say at A*, more than half of our seeds have been pseudo-proprietary in nature. That doesn’t mean no other funds were around it. That doesn’t mean they’re not meeting other folks.

Jack Altman

It means you didn’t start cold during the process.

Bennett Siegel

Exactly. We maybe were first to reach out to them. We had some informed knowledge. We had a dinner with them in the past. There was some relationship of relevance and some insight we had going in around who they were as a founder, what they wanted to do.

Jack Altman

Is it obvious to you off the cuff which half of your investments are better?

Bennett Siegel

Yes. The half that we had some prior relationship with, that were somewhat proprietary, have disproportionately generated returns. Though we have done well with some of these shotgun marriages, I would say there’s higher volatility.

Jack Altman

One of the things I think is interesting in seed is that there aren’t that many firms that stick around seed for a long time and are very successful. I gave the example of First Round. You guys are obviously doing great. There’s a couple others that have been around for long periods of time.

But a lot of times people either leave seed, or they stop doing what they’re doing entirely, or something else happens. Why is it that it’s a less persistent part of the market than multi-stage, in your guys’ view?

Why Seed Firms Don’t Last

Kevin Hartz

Seed is just incredibly hard. It’s so challenging. You’re investing in people, no product, hardly even a roadmap or anything else. You have a great deal of uncertainty day in and day out. Then compound that with the current environment where the multi-stage firms have come in and want to get a toehold in seed, so they spray money in.

Jack Altman

When you say seed is hard, do you mean hard in the sense of high effort, or hard in the sense of difficult to get a good result?

Bennett Siegel

Both. You work incredibly hard to build relationships with founders and earn the right to invest $2-5 million in a company that by all odds will likely not work. Most companies do not become billion-dollar-plus companies, and if it’s not a billion-dollar-plus company it has almost no relevance to the performance of your fund.

It is genuinely hard to find these founders. It is genuinely a lot of work to convince them to partner with you, and it’s even more work afterwards to support them in building a company. So you have two facets of this. Historically, seed firms that have been successful maybe do not continue to adapt to the environment. They don’t refresh their networks, they don’t continue to be aggressive as new types of founders and new technologies emerge, and they tend to fall by the wayside. That’s one crop of seed funds.

Others that have been successful, that have found one or two or three amazing companies, they grow up, they graduate, they raise opportunity funds and growth funds. What’s left is a relatively small group of firms that still specialize at seed and look to work with the best founders, and don’t try to find value deals or diamonds in the rough, but compete to be the partner for the next generation of winners. If you can’t do that, seed is a bad asset class.

Kevin Hartz

Just to emphasize, venture capitalists should be much better managers of people, too. The generational change, handing things off, very few firms make it on from there. They usually die with their original GP.

Jack Altman

What do you think is the big source of difficulty in generational transition? Is it finding talent? Is it older partners letting go? Where do you think most people get it wrong?

Kevin Hartz

My perception has always been finding talent, but I’m sure maybe older GPs are holding on a bit long. You’ve got to find that needle in the haystack out there, somebody who’s going to be able to identify the next Google.

Concentration and Doubling Down

Jack Altman

It’s also interesting because as funds grow, you guys could very easily make a lot of investments in your seed companies that are performing well and start putting huge amounts of capital behind them. One day you could wake up and your growth fund is bigger than your seed fund, and now the incentives are to buy as many of your dollars as possible. I think that sort of explains where the focus goes.

Kevin Hartz

Are you inviting us to do Series A’s now?

Jack Altman

A hundred percent. A, B, C, whatever. Do it all.

Kevin Hartz

Do it all.

Bennett Siegel

We’re a little different from a traditional seed fund. We do have a reserve-heavy model. We do have more capital available for follow-on than seed. If all you’re writing is the first check in seed, it’s exceptionally hard to drive returns. For our best companies, we’ve piled in every single round, and out of a portfolio of 40 seed investments, we might have 3, 4, 5 companies that have the lion’s share of our capital. It’s concentration, but different than the way that a traditional growth fund would talk about it.

Jack Altman

You’re saying seeds hit so infrequently that if you don’t double down on the few that work, it’s very hard to get good returns as a basket.

Bennett Siegel

I think that’s absolutely true, and I don’t think your fund is going to return the multiple. We look at others of our peers who look at pro rata and say, “What’s peanut butter pro rata everywhere?” You always want to support your founders, but as you look at the Series A, the B, the C, the D, those follow-on decisions are actually in many cases more important than your initial investments.

Jack Altman

What’s interesting is I would argue that from a basket of seeds, it’s actually very difficult to tell by the Series A where you should be concentrating. But a lot of funds just do their pro rata in the next round, and that’s that. That really is just peanut butter across all of it. I would think it’s much easier to know where to put huge amounts of money a stage or two even later than that.

Kevin Hartz

Agree. In our case, we do agree to support our companies in the A. We’ll always do the pro rata in that round and then watch. But you’re right, like that inflection…

Jack Altman

There’s a different pool of concentration. Let’s say you had a fund that was a $100, and $40 of it’s going into initial seeds, and then there’s $20 for those pro ratas. I would think for the last chunk, done right, you’re probably doing 10% of the fund into a few companies each, that kind of thing. Is it that concentrated?

Kevin Hartz

This is interesting because Brian Singerman is creating this LP fund to find new managers to be able to concentrate and help them go all in. Since 2005, that’s what Founders Fund kind of pioneered, breaking the old venture rules and putting this inordinate amount of money in. Like when they sold all their Spotify off at a $9 billion valuation and rolled it into Airbnb, that was pretty monumental.

Jack Altman

Which is interesting because that’s more of a trader mindset, which you don’t normally see in venture. Spotify did well, but I guess that was a good trade because Airbnb was at what, $2B or something like that?

Kevin Hartz

Yes. $2.5B.

Jack Altman

So instead of getting a 5x, you got a 50x. Great.

Bennett Siegel

You need to know what great looks like to be successful. For us, we have a $450 million fund. More than 50% of the dollars come after seed. Most growth investors look at seed companies and they’re completely uninteresting: it’s a founder, it’s a product, it’s raw. Most seed investors look at growth companies and they say, “These are all amazing. Oh my God, they have product-market fit and revenue and scale, and the founder can actually string together two sentences.” That’s historically why people create separate early and growth stage teams.

To be really great as an early investor and to follow your founders as they mature, you need to know what great looks like at every level. To your point, the Series A may be a hard stage to do that. Obviously you as a practice now are picking that stage, so it should get easier over time. But as things become more consensus, they get more expensive. It’s harder to buy ownership. So it’s always that pendulum on where you want to be on the risk curve.

Kevin Hartz

The other side is, when you do back the truck up and really go for it, ensuring that it is the money round. In ’06 or ’07, we used to sit on the floor and project SpaceX launches. They’d launch them in the South Pacific somewhere and they would blow up every time. That was the sucker’s bet, to actually invest in those rounds as these things were blowing up. But as soon as they got one into orbit and that landed the contracts, that put forth the sequence of events. Then that’s the next phase of putting money in. And certainly Starlink was the big unlock more recently.

Rollups and the Venture Math

Jack Altman

Founders Fund’s SpaceX concentration is extremely impressive, to do it over and over into that company. I guess the key is, you’ve got to have a SpaceX in the portfolio that’s worth concentrating into for 15 years, but it’s still pretty impressive to do it. A lot of people just wouldn’t have the stomach for it.

I’m curious about some of your guys’ opinions on AI. Obviously I know you spend most of your time trafficking in founders and talent, but I also know you guys have strong opinions about the market and where it’s going. I’d be curious to hear some of those.

Bennett, maybe starting with you. We had talked a little bit about rollups, buying businesses that are older, established companies and applying AI to them. I know you’ve got a background doing growth as well, so you have some more familiarity with this. What’s your view here?

Bennett Siegel

There are a few things that are going to be worse for incumbent businesses and the venture capitalists that are participating in these, than the work of buying and transforming and dealing with the culture and the process changes. Everyone thinks it’s as easy as buying a business, deploying AI, improving free cash flow margins, and earning a return.

Private equity firms have been doing rollups forever. It’s incredibly challenging to turn around an existing business. I think this is actually a great business for founders. It used to be that you had to raise capital, you had to buy an asset, you had to improve the asset, and you would keep 20% of the profits. Now a founder can go and raise venture capital dollars, dilute 20%, so keep 80% of the profits and go buy a business. It is phenomenal for them. I think it’s an exceptionally tough asset class that allows venture capitalists to raise lots of money, but I think it’ll be very hard to achieve real profits doing it.

Jack Altman

By the way, on that point, as the venture capitalist, don’t you need the thing to appreciate a lot just to get back to even?

Bennett Siegel

Yes.

Jack Altman

If you gave somebody $1 billion and then they went and bought an asset for $1 billion and you only own 20% of that thing, don’t you now have $200 million?

Bennett Siegel

The ironic element of this is that the founder can’t lose. The founder has literally bought into a business with embedded asset value that they now own a large percentage of. But unless these companies appreciate dramatically in value, the venture capitalist owns a relatively small percentage. Now people are doing convoluted structures where there’s a holdco and an opco and there’s carry and there’s waterfalls. But no one has actually proven a way that you can monetize this in any way that resembles venture-like returns.

Kevin Hartz

The other dimension of it, in this venture capital/private equity play, is simply that venture capitalists are very good at watching the top line. They want things to blast off, and they’re not so precise. This is all about the top line, but the bottom line more importantly. Venture capitalists don’t pay as much attention to that with their companies. So it just doesn’t feel like the right culture fit for this sort of stuff.

Jack Altman

Are there any forms of rollups or structures that you are bullish on? When you look around the different types that are happening, is there any form where you’re like, all right, if I had to buy one, that’s the one I’d buy?

Bennett Siegel

I think there is something to be said for looking at services-oriented professions that have largely recurring, if not truly recurring, revenue sources, and looking at how you could replace people with technology. Because if AI has been very good at one thing, it’s looking at traditional pockets of labor spend and automating it.

So there’s a reason why accounting rollups are interesting for people. There’s a reason why HOA rollups are interesting for people. I think ITSM as well, for that reason. It all deals with tickets and deflection and replacing call center people. That feels like a very interesting area, but I would argue 90% of the value created is going to be buying the asset for the right multiple, which once again, venture capitalists are historically very bad at.

Jack Altman

So you’re not going to be doing any rollups?

Bennett Siegel

We will not be doing any rollups today at A*.

Kevin Hartz

On the other side, there are always great teams, exceptional teams, in using technology. Bending Spoons comes to mind, as we just sold Eventbrite to Bending Spoons. That’s an incredible operation of how they integrate all these assets, and what they’re doing in Milan is remarkable.

AI Application Layer vs. the Labs

Jack Altman

What about within AI? What are you guys most excited about? Where are you anxious? Maybe frame up a common meme right now. Software’s extremely difficult because the labs are just expanding, and the workflows are being replaced by agents, and the workflows I need that are important, the labs are going to own.

Kevin Hartz

We can’t take that position. We want to back these independent companies. The labs need to have a very audacious appetite and keep the growth up. But we’ll still keep backing the application layer all around, where we see the right barriers, the right teams, and so on.

Bennett Siegel

There’s a distinction, obviously, between application-layer AI companies and more traditional incumbent software. I don’t know the last time we’ve heard a founder pitching a traditional software business. Now, part of that is the meme that everything’s an AI company. Everyone puts AI in their deck. I think systems of record are still very sticky for a reason. The issue, we all know, is if you can vibe-code an app in a matter of minutes, why do you need so many engineers? What’s the value of the workflows that you’ve built?

But what we’re seeing on the application layer is that people are going after systems of intelligence, going after systems of action. They’re new types of spend, and we’re going to continue to back those. In terms of the public markets, there is a reason software’s having significant drawdowns, but the best companies should be able to navigate this. Kevin mentioned early on that we were investors in Ramp. I would say they are a great example of an incumbent pre-ChatGPT company that has now become an AI business, and agents are driving top line and margins.

The best teams are going to adapt. So I think you’re fine if you’re in an incumbent software business, as long as you have a team that is going to rearchitect everything from the ground up.

Hardware, Robotics, and What’s Out of Reach

Jack Altman

What about hardware and hard tech? I know you’ve been incubating a company that is software-enabled hardware, I think. I assume you guys have been investing in it. How do you guys think about non-software, potentially even non-AI, but at least hard tech hardware companies?

Kevin Hartz

Again, we want to go where the talent is, and we’re being drawn to these various hardware companies because there are really impressive people. It’s happening across the board. There’s a revolution there. We certainly don’t want to get caught in the same traps that have been difficult for hardware in the past, but hardware puts you out in the real world. Before, in software, we were trapped like a brain inside of a jar. Hardware and robotics and so on is an exciting new world for us.

Jack Altman

There is some good defense if you have some sensors and things out in the world, at least. Someone can’t just come along and vibe-code that.

Bennett Siegel

I think that’s exactly true. We just haven’t hit the ChatGPT moment for robotics. AI for the physical world should be as large, if not larger, than what we’ve seen for the knowledge world. The challenge is, right now, we haven’t seen much in the way of commercial applications.

We don’t care, we’re seed investors. We’re backing robotics companies, we’re backing companies working on sensors and edge AI. But we do think about the number of robotics companies that have raised at huge valuations with very little commercial promise. So we think a lot of this is still to come.

Jack Altman

Are there types of companies that you are excited about but, given your fund size, you just can’t engage in? I’m thinking of neolabs, or heavy robotics projects, or things like that that don’t start with a $5-10 million seed round.

Kevin Hartz

Alas, those are tough to see and have them go by us. But with that said, we’ve been able to invest in a lot of scrappy, verticalized robots. We’re in a company, Watney Robotics. It’s data center cabling and robotics. That is a very specific task that’s very high value, and it differs from going after a full horizontal market.

Bennett Siegel

Or we backed a research team out of Stanford called Simile, which is focused on market research, which went on to raise a hundred million after the seed round. At the time they only needed a little bit of money to prove out and commercialize their research. Those are the rare exceptions as you know. The normal case is they skip that little seed round, despite how hard we try to convince them of the value of it, and they raise $10M, $50M, $100M dollars. By the way, that is where a lot of the multi-stage dollars are going at seed. We can’t really do those rounds.

What’s Next for A*

Jack Altman

Makes sense. So you guys have this new fund now. Any changes coming for A* overall, or is it just more of the same. Bigger, better, faster?

Bennett Siegel

I think it’s more of the same. As you know, there’s inflation in round size. There’s a larger volume of founders flocking to start companies than ever. I think we just need to be playing the game on the field. We need to be meeting founders where they are, moving quickly, and leading seed rounds, and hopefully we can be a bigger and better partner over time as our fund size has grown modestly.

We started with a $300 million fund five years ago. Our new fund is not that much larger. We look to a lot of our peers who’ve stayed focused, who’ve become experts at their craft. That’s what we look to emulate, and what we’ll continue to do.

Kevin Hartz

We can also extend out. We’ve shown to be very patient, and we’re not just trying to put capital to work. We wait patiently for those right companies, even if it takes a little longer to deploy.

Jack Altman

You guys are moving into this building, right?

Kevin Hartz

We are.

Bennett Siegel

We want our founders to keep moving up the floors when they raise their future rounds.

Jack Altman

Fund them, send ‘em over here. It’s beautiful.

Kevin Hartz

We could put in a fire pole.

Jack Altman

I love that. I think we dig a little hole somewhere. I don’t know if you’re above or below.

Kevin Hartz

Of course below. It’s a seed thing.

Jack Altman

Yeah, exactly. All right, thank you guys. This is super fun. I appreciate you both making time for it.

Kevin Hartz

Thank you, Jack.

Bennett Siegel

Thank you.

I sat down with the co-founder and CEO of Kalshi, a prediction market reportedly worth over $20 billion.

After years of struggle, Kalshi won a regulatory battle, culminating with their successful suit to overturn a CFTC decision, giving them the ability to allow consumers to bet on politics, sports, weather, and more.

Tarek shared the history of how he got here and what kind of company he had to build to weather all the uncertainty.

I also got a chance to push him on Kalshi’s place in the world and its potential for positive or negative impacts. I was persuaded by his arguments that it can be a big force for good.

We closed out by talking about his ideas around company building, hiring, and the future of Kalshi. Hope you enjoy.

Timestamps:
(0:00) Intro
(0:23) Kalshi’s genesis
(5:05) Regulation-focused from inception
(11:06) Suing the government
(18:02) Gambling vs. financial markets
(20:58) Defining insider trading
(25:38) Incentive structure of the system
(32:40) Investing vs. trading
(35:31) Hedging use cases
(41:38) Scaling a lean team
(44:02) Defining Kalshi’s culture

Links:
https://kalshi.com/
https://x.com/mansourtarek_

Watch on YouTube; Listen on Apple Podcasts or Spotify

Subscribe now

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

From Lebanon to Wall Street

Jack Altman

I’m really excited to be here with Tarek, CEO of Kalshi. Thanks for doing this. I’ve been looking forward to it.

Tarek Mansour

Thanks for having me.

Jack Altman

I want to start with the history of Kalshi. Yeah. Can you take me through the genesis, how the idea came together, how the company got started?

Tarek Mansour

A little bit of background before that. I was born in California. I grew up in Lebanon. Lebanon was a rough terrain to grow up in. It’s super volatile, a lot of uncertainty. I found refuge in math. It was a mix of different things. I grew up with a single mom, my mom was like, “I want you to be successful. Maybe math is a thing to get you back to America.” So I got really into math and then a lot of my decisions at that point were basically like, “What do the best, smart math people do? Oh, they’re going to MIT so that’s what I need to get into.”

I got into MIT and then the next stage was the same question and the answer was finance. I started spending time in finance. I worked at Goldman, I worked at Citadel. I worked at some small prop shops. Luana did Bridgewater and Citadel as well.

There was a pattern that was emerging in a lot of these places. This is the example I always love to give. In 2016 at Goldman, I was working on this desk and there were two questions that were bothering everybody in Wall Street. These are two questions that people are figuring out how to trade on: will Brexit happen and will Trump win the 2016 election? People wanted to have the Trump hedge or the Trump trade. The thing that really stuck with me was that…

So Brexit happened and it was a shock. People were really completely shocked. The polls were saying this was not going to happen. People had all these smart trades about how to hedge against Brexit, but then a bunch of desks on Wall Street blew up and they lost money and all the bad stuff.

When it came to Trump, a very similar thing happened. The trade that we sold at Goldman, the very common Trump trade, was to short the S&P. Because if he’s going to win, the S&P is going to go down. Everyone bought that trade. That was the trade. It was a horrible trade because Trump won and the S&P actually… I think it was sort of like the single biggest rally in the S&P’s history ever essentially. It’s like the worst trade.

Jack Altman

The exact wrong way to trade the idea because what you were trying to trade was this underlying thing that you got right, and then you expressed it backwards.

Tarek Mansour

They were right about the prediction and they lost money.

Jack Altman

This kind of is like when a company has quarterly earnings and people are like, “Oh, it’s going to beat earnings so I’m going to try to buy the stock. And then it beats earnings and the stock goes down.”

Tarek Mansour

And they’re all smart in retrospect. If you actually trace the plot of whether the stock went up or down after an earnings beat, I think it’s pretty much 50-50. It’s mostly priced in.

I realized two things. The smartest traders and institutions, a lot of their trading ideas, the things they’re trying to do, originate from a simple human view about the future. “I think Trump is going to win.” “I think there’s going to be some change in diplomatic relations between these two countries.” “I think COVID is going to come back.” The way they thought they were trading on it with traditional markets is the event, but what they’re really trading on is the reaction function, how the market was going to react to an event.

They weren’t trading on whether Trump was going to win. They were actually trading on how the S&P was going to react to Trump. In retrospect, we can’t really predict that. It’s so impossible to predict. It was a very exciting idea because what if we just build this marketplace where what you’re trading is—

Jack Altman

The specific thing that you’re thinking about.

Tarek Mansour

Yeah. It’s just things that people care about, whether politics or economics or weather, or really any topics that people naturally walk around the street and think about. People don’t think about, “What is Cisco going to print? What are their financials next quarter?” They don’t think about that. They just think about, “The Fed might raise interest rates,” or things that are simpler. So that is exciting, because the TAM could be much larger, a large number of people would care.

The second thing that was really interesting… If you believe in markets, what markets really do is aggregate information. They are a very good weighing function. They can figure out how to take information from a bunch of people, aggregate it, and get a single price. So what if we apply that to all these specific events or questions about the future? In theory we should get a smarter, more accurate, market-based answer about all these questions.

That got me really excited. At the time we were thinking, if we could get a little bit smarter about the future, that’s a very worthwhile product to build. You don’t need to be 100% smarter. Even if you get 10% smarter about the future, that’s more than enough. That’s how I got into prediction markets. We can talk about the whole history of prediction markets and all of that. I got really obsessed.

Starting Kalshi

Jack Altman

So when you got started with the company, what were the first couple years of building like? What did you do when you got started?

Tarek Mansour

I was actually going to go work at Citadel, because I had spent a summer there and I actually loved it. It was one of those situations where Luana and I started talking about it, and the idea was just bothering me. I could not get it off my brain. I’m a little bit OCD and I get obsessed with things. I couldn’t get it off my brain. One thing I always say is that we were not entrepreneurs trying to figure out what product to build to build a company. That was not how Kalshi started.

Jack Altman

You just had this one idea,

Tarek Mansour

The idea forced itself on us. I was like, “No, forget about that. Let me just go to Citadel and they’re going to pay me all this money.” But then I remember we had a friend who was going to a YC hackathon. I don’t know if they still do them, but they used to do these hackathons and bring a bunch of builders. He was like, “Oh, I’m going to this thing, you should come.” I was like, “I think the deadline has passed.” He’s like, “No, you should just email the guy.” I forgot who the organizer was at the time but we emailed something like, “Hey, we were trying to figure out flights or something.” He’s like, “Yeah, fine, you can just come.” So we were like, “Okay, we should just go.”

We did the hackathon, we put together a front end for what the v1 of it was: a bunch of questions in a list format with yes/no, and then some probability. It was like an order book. Literally, we just copy-pasted what the New York Stock Exchange order book would look like. It’s funny, because we had judges who were going to judge the different teams and pick the finalists. Our judges were Michael Seibel and Christina from Vanta. I don’t know if she had started Vanta at the time, or she was in the early innings of it.

Jack Altman

When was it?

Tarek Mansour

It was October 2018.

Jack Altman

Yeah, I think she had started it

Tarek Mansour

She had started it?

Jack Altman

I think so.

Tarek Mansour

We started pitching the idea and it was great. I remember Michael was like, “Oh, everything is great about this idea, except for the fact that it’s totally not allowed in the US and this has absolutely no way of existing in any way, shape, or form.” We were like, “Look, we tried, move on.” I remember I drank a bunch of beers at that hackathon. “We’re done.”

And then this guy ends up picking us to be finalists. He just dunks on the whole thing and then we end up winning that hackathon. We were like, “Maybe we’re onto something.” That got us into YC. We were like, “We have to give YC a shot.” At the time I was like, “Wow, I never expected to get into YC.”

The first year was crazy. You know how there’s this thing about YC where the cool companies are building products and getting all these investors excited? We were the total opposite of that. We had no product, no customers. Week to week, we’d go to office hours, and everyone was like, “Here are my KPIs and here’s traction.” We were like…

Jack Altman

“We’ve got nothing.”

Tarek Mansour

Nothing. We were just like, “We talked to this lawyer who said no,” and then the next week was—

Jack Altman

It’s tough. I did YC, and one of the most notable parts of the experience—which I think is a very positive part—is every week you come back with your group and everybody else has grown 7% week over week, and how much have you grown? You’re just like, none. Doesn’t feel good.

Tarek Mansour

None. I don’t even know what the product is yet. But the vision was always clear. For us, the key question was, how do we get it regulated? From the beginning, we made a decision. We’re not going to launch a product outside of the realm of the law or regulation. We wanted to figure out how to get this regulated in the US, onshore, no matter how long it took, no matter what.

The early days were really tough because we had no progress on regulation. Regulation is not linear. It’s not like you get encouraging status updates from regulators.

Jack Altman

There’s big bang moments almost.

Tarek Mansour

Exactly. It’s zero all the way up until approval, nothing in between.

The Regulatory Desert

Jack Altman

Can you talk about what those were for you?

Tarek Mansour

So that was 2018. We spent the first two years essentially figuring out which lawyer would take this on. I became somewhat of an expert in the law around commodities, which is where I thought this would get regulated. Essentially, there was no proof in the law of why this shouldn’t exist, but there were a lot of things to figure out.

Jack Altman

What was the law at the time? What was not allowed?

Tarek Mansour

It says that a commodity could be an occurrence or a contingency.

Jack Altman

So was the issue with the definition of the commodity?

Tarek Mansour

Yeah. The issue is, we’re used to futures like grain, things that are tangible.

Jack Altman

Right. An election outcome is hard to put a thing around.

Tarek Mansour

Imagine two 21-year-old, 22-year-old MIT kids just walking into the regulator. We got this lawyer Jeff, who’s ex-CFTC. The regulator is the CFTC. He got us the first meeting with the regulators. Two kids are like, “Here’s our 40-page deck plan of how we could regulate this thing.” They’re looking at us like, “What are you talking about? Here are all the issues. How are you going to police for manipulation? How are you going to list this sheer number of markets?”

Usually in our markets, like the CME or New York Stock Exchange, those exchanges list one or two new things a year, or every few years. You’re talking about listing hundreds. Tens of markets sounded crazy.

So it was a lot of these hurdles, none of which felt impossible. But if you add them all up, it started to look like Mount Everest. The problem is that you start climbing Mount Everest and then somehow…

Jack Altman

You see a higher peak.

Tarek Mansour

Yeah, it keeps going. We had no certainty it was going to end. That was the toughest part. It wasn’t actually the work. The work was regulatory all day.

Jack Altman

Usually you could fix this thing, but it might be like, we haven’t made a dent.

Tarek Mansour

It’s like a desert. You don’t know if it ends, and so psychologically it’s very taxing. Because you’re walking in that desert and you have no idea if this thing is ever going to end. You may actually just die and you just walked for years in this desert.

Jack Altman

So what happened?

Tarek Mansour

We were just so stubborn. In those situations, you’ve got to stop thinking. You have to have no introspection.

Jack Altman

Marc Andreessen.

Tarek Mansour

Yeah, he got a little flame for that one. But it’s more like you have to have a bit of tunnel vision. We are going to keep going until we’re proven wrong, i.e. we die. Or we find the other side.

Jack Altman

Can you talk about finding the other side?

Tarek Mansour

Towards the end of 2020, we started seeing… They would send an issue to us, one after the other, and then it started fizzling out. These guys started to be like, “Wait, maybe these people are actually serious.” At some point you run out of issues to find. We walked through all of them and worked through all of them. Think of thousands and thousands of legal documents and pages, et cetera. We started angling towards an approval, and we got approved in November 2020 to get the first regulated exchange for prediction markets.

On the same day as our approval, the election happened. The new administration came around. Our approval was bipartisan, it was Democrat and Republican, but the new administration was like, “Wait, pause, pause. We’re going to have to think through this.” In some ways we were like, “Oh, we are finally through the desert.” But all of a sudden, “Oh shit, we got dropped back into the middle of the desert.” It was like, “We’re going to have to see if we can let you do all these things. Maybe we’ll let you do four economic markets, but not this broader vision.”

That was disheartening. It was really hard because we had spent two years, we were finally there, we were going to launch. So we started the first battle to launch the exchange, and we were like, “Fine, you know what? We’ll launch with the four economic markets.” We never thought that would get product-market fit, which it didn’t. But we were like, “We’ve got to get out the door now and launch and see what happens.” By the end of 2021, we launched with a few economic markets, no traction whatsoever. At the end of 2021 is when we were like, “Okay, we have to open up the space to get all the markets we want.” This is when we started talking about the election market.

For prediction markets—we can talk about the dynamics— we always thought that you need the diversity of markets, but you also need a catalyst. You need something that is enough of a driving force to get people noticing, so that you can break through the supply-and-demand problem. You need something strong enough to get the chemical reaction going. Because you have the supply-and-demand problem, the chicken and the egg. The chicken would come and there’s no egg, and vice versa. You need something strong enough to get everyone at the same time to start trading, and then after that the thing can get going. But also, I think it was one of the best ways to explain to people why prediction markets are powerful.

You need an event that everyone cares about and where we can provide a better product, a better forecast. At the end of 2021, we start talking to the CFTC, and they say, “Maybe, et cetera. Maybe we’ll do it by the end of 2022, or for the midterms.” A whole year of just regulation again. So now we’re three to four years in, just doing regulation. By the end of 2022, the regulator sort of nudges the approval past the deadline. Essentially they just didn’t make a decision.

That was a very hard time at the company, because we thought the approval was going to come. We’d done all the work possible, very tunnel-vision. Again, we didn’t get it. In those circumstances, what happens is people blame the execution of the strategy. It’s never that things are outside of your control. It’s like, “We made the wrong decisions, and it was bad.” We lost a bunch of the team at the time, we had to do some layoffs.

It was a really, really hard time. I think back at that time, it was one of the most painful times I’ve ever experienced in my life. By the way, I went through war in Lebanon. I’ve had missiles drop next to my house, things like that. It doesn’t compare. I think there’s some form… because you feel shame as an entrepreneur. You get it. That feeling of—

Jack Altman

Yeah, no, I’ve had to do layoffs. It’s awful.

Suing the CFTC

Tarek Mansour

You have responsibility, and people are trusting you with all this. We come out of this in January, February, we’re reconvening, what do we do as a company, et cetera. I remember Luana has this sort of dogmatic belief in the vision. Should we pivot? Clearly we’re not going to be able to do this. Luana was like, “We’re going to try again.”

So the strategy for 2023 was, we’re going to do the exact same thing as what we did in 2022, and we’re going to try again. It was unpopular, but we did it, a whole other year of the same thing, talking to policymakers, regulators, the same regulator, et cetera. Then they block the election market at the end of 2023. The same thing happens again. This was the point…

Sequoia likes to call these crucible moments, but I think it was the key decision that got the company to where it is today. We sat down and we were like, “What do we do from here?” Again, Luana was driving a lot of this, but it was like, “Look, we strongly believe we’re right on the law. We also strongly believe this thing should exist. We have come so far. We’re now five years in. We’ve just got to sue the government, and we’ve got to sue our own regulator.

We took this to the board, talked to Alfred. The interesting thing that came out of that conversation is that it’s definitely an anti-pattern for a company to sue its own regulator, or the government in general. It’s even more so for a company of 20 people that has no real product. We’re a nobody company at the time.

Jack Altman

Is it an anti-pattern? I think a lot of great consumer companies have gotten into… I don’t know if it’s a full dispute with their own regulator or a full lawsuit, but at least some legal battles.

Tarek Mansour

Maybe it’s the sequencing.

Jack Altman

Yeah, maybe they got big.

Tarek Mansour

Airbnb and Uber were really big. We’re talking about a platform that has—

Jack Altman

Coinbase, maybe.

Tarek Mansour

Coinbase got really big, right? We’re talking about a platform that—

Jack Altman

Yeah. It was tiny.

Tarek Mansour

We had hundreds, maybe thousands of users a week. It was the evangelists, the really early adopters. In terms of, this is the unlock that will get us going…

I remember Alfred was saying, “Even if we win, even in the offshoot crazy shot that we win, we may still lose because the regulator could kill you in the meantime.” It’s like death by a thousand paper cuts, and it was real. This notion of lawfare, people just coming after you for all these unrelated things, but you know it’s because you sued. You sued your own government and a lawsuit is a big battle, of course. It’s a big deal.

But then I remember Alfred saying, “But sometimes some of the best companies I’ve ever seen start with an anti-pattern. There’s something weird that happens in that company that is unusual. And maybe this is yours.” So we decide to sue. All the bad things that were predicted happen, all of them. All the little things, like, “Oh, we’re not going to let you do this. We’re going to delay this. We’re going to kill you on this.” The audit that was supposed to be two weeks is now like 18 months.

Jack Altman

Oh my God.

Tarek Mansour

It’s nonstop, just knife after knife. But the most important thing is we won, in October 2024.

Jack Altman

How long did that suit take?

Tarek Mansour

A year.

Jack Altman

A year. During that year, you’re just stressed out of your mind?

Tarek Mansour

Yes, but not more than the other ones, because at that point it’s—

Jack Altman

“It’s my last shot. What else am I going to do?”

Tarek Mansour

Walking the desert had become our life, and it was our last shot. It was a bit of desperation. Your back is against the wall.

Jack Altman

“If I don’t do this, I’m not going to make it anyway, so who cares?”

Tarek Mansour

Basically. I don’t think we thought there was any shot at making… We had to get the election market. At that point it was more than just business, it was a mission thing. We wanted to deliver this to the world. We were so dogmatic about it. We wanted the world to see this market in action and see how powerful this thing can be.

Jack Altman

Okay, so you win the lawsuit. Now we’re ready.

Tarek Mansour

Now it’s interesting because we won the lawsuit.

Defining a Financial Market

Jack Altman

Specifically what the lawsuit enabled is what?

Tarek Mansour

The lawsuit was, in some ways, redefining what constitutes gaming or gambling versus a financial market. It’s interesting because there was a lawsuit prior to that—

Jack Altman

So basically it’s now saying things like betting on the president or the outcome of a sports game…

Tarek Mansour

Can be a financial market. There are two elements to that. Very simply put, one is, what is the structure? Are you an open and free market where people are just trading against each other? Versus a house where you’re accepting bets from someone and your business model is gambling, your revenue’s equal to customer losses. The second thing is, is this a real thing that’s happening in the world, where some people may benefit from hedging?

Jack Altman

Basically, by being the marketplace where other people are betting against each other, that’s critical in not being gambling.

Tarek Mansour

That’s a very critical thing societally, but also legally. But also, very simply, there’s a difference between two people transacting on, “Hey, what is this dice going to land on?”—because that’s an artificial risk that you are creating just for the purpose of trading or betting on it—versus if you’re trading on a stock, which exists, a company exists, or oil, or an election.

Jack Altman

Got it. So it’s also the event existing, whether or not—

Tarek Mansour

It’s a natural thing. It’s a natural event, not an artificial event. That’s very important. It’s interesting because the decision that came out of that lawsuit is very similar to one that came out close to 120 years earlier, in 1905, in the Supreme Court, the one that legalized grain futures, the most boring financial market, the OG hedging market.

At the time there was a state versus federal fight, where the states were claiming, “This is gambling, because some people are speculating.” Farmers were going and betting on the price of grain, so that’s gambling. It must be gambling. The Supreme Court said, “Look, a lot of people will speculate. But there are some people that are using it for hedging or getting smarter about the price of grain over time.” That’s why it’s a financial market, and actually, in many ways, the speculation is necessary for that market to exist.

If you want a market—if you want the stock market to exist, if you want commodity markets to exist, if you want prediction markets to exist—you need speculation. You cannot just have people insuring themselves against stuff, because the person on the other side needs to be a speculator. In some ways it’s kind of like history repeating itself, but it redefined the aperture of what’s allowed.

Jack Altman

It would be legal for somebody to speculate on whether or not we were going to say a certain word in this podcast? Would that fit the definition, if people wanted to trade on that?

Tarek Mansour

Yeah and it’s happening.

Jack Altman

It’s happening anyway.

Tarek Mansour

It’s happening anyway. They can bet with each other, and they’re trading against each other. It would not be legal for us to and we can talk about that. If we had a position, we cannot go and trade on that, and then you just go say something. That would be market manipulation.

Insider Trading and Fairness

Jack Altman

Is it illegal to bet on something where you see a bet playing out in the world, but you know the answer for sure?

Tarek Mansour

It depends. That’s the whole conversation we’ve been having around insider trading. There’s a whole long history here. We are a regulated financial market. We’re a regulated exchange and clearinghouse. A lot of the rules we have are mimicked after the rules of the stock market.

In the stock market, the line is drawn: you cannot trade on material non-public information. The way that’s defined is, you have a piece of information that you acquired under certain rules. One of those rules is that you cannot disclose it. So material non-public information is information you’re not allowed to disclose.

If you, as an executive of Tesla, went and said it to the press, you would get in trouble. You’re not allowed to do it. Trading is a form of disclosure. That’s the whole point of prediction markets. Prediction markets are a way to disclose information. When you trade, maybe you’re not saying it on Twitter, but you’re actually trading that information, and you’re moving the price in a way that discloses the information.

Jack Altman

Let’s say this morning I saw a trade that was, “Will Jack and Tarek see each other today?” I’m like, “I know the answer to that, so I’m going to make a big bet.”

Tarek Mansour

Are you Jack, or are you someone else?

Jack Altman

I’m me.

Tarek Mansour

You have influence on that. You have direct control over that. So that wouldn’t be insider trading, that would be manipulation.

The majority of participants in grain futures are grain farmers. The way that the price of grain futures is done… This is going to be a little surprising. Can you guess how they determine the price of grain?

Jack Altman

I don’t know. How?

Tarek Mansour

You literally survey a bunch of the farmers that are trading in the market. It’s a little weird, right? They definitely have inside information then, because they’re the guys and they know what the price is. It’s interesting, because the line there has been, “Okay, insider trading is very hard to define in grain futures. But where we’re going to draw the line is, you cannot put a position and then artificially manipulate the underlying price. You cannot move the event or the underlying in a way that will help your profit.”

So it’s the same thing here. If you have direct control over an event—if you’re a politician that was looking to pass a bill, you take a position, then you tank the bill or you try to pass it even harder—that’s illegal. That’s banned on Kalshi.

Jack Altman

I could see that it could get a little gray, though. Back to us talking on the podcast today, let’s say you’re a friend of mine, and you knew it was happening. You don’t really have control over it. But you could be like—

Tarek Mansour

It’s the same as the stock market. Is the cousin responsible? If someone on the street heard an executive talk about some MNPI, are they allowed to trade it or not? These lines have always been—

Jack Altman

Does this stuff come up a lot or not?

Tarek Mansour

Yeah, definitely. Look, this is a conversation that Kalshi alone will not have all the responses to. It’s a conversation we’re having with regulators and, over time, policymakers. But my principles are generally simple when it comes to this. I always go back to, why is insider trading banned on the stock market? There are some people that would argue, maybe we should let insider trading happen in the stock market because it would make the prices more accurate.

Jack Altman

Yeah. My reaction to it is, it feels unfair.

Tarek Mansour

Exactly.

Jack Altman

People got money for no reason other than they were told something, and that shouldn’t be a source of people generating wealth.

Tarek Mansour

Exactly. It’s all about unfairness.

Jack Altman

It feels like there was no skill and no effort that went into it.

Tarek Mansour

Yes, and it’s actually even worse than that. There’s a very practical implication, not just a moral implication, to this. The practical implication is that if people believe the stock market is rigged, they stop trading. The liquidity dries up. There’s this nice property of markets. Markets that have a lot of insider trading, in some ways, are not going to exist.

Jack Altman

At some point, at the limit, you’d be like, “If I don’t have insider information on a stock, why am I trading? I’m definitely the sucker.”

Tarek Mansour

There’s a mix. I think you have to have information on something. Seeking information is very good, doing research. For example, I don’t know if you’ve ever heard this, apparently Two Sigma used to—I don’t know if it’s Two Sigma specifically—use satellite images of the parking lot at Walmart to figure out how many cars were coming in.

Jack Altman

Probably even before that, people would just hire somebody to sit outside of Walmart and just see what the foot traffic is.

Tarek Mansour

That’s not insider information. Exactly. That’s information.

Jack Altman

That’s just work.

Tarek Mansour

That’s work. Exactly. But I think there’s a balance. To me, insider information, the way to define it is information that you could not get access to with work, if you’re not an insider.

Jack Altman

That’s right.

Tarek Mansour

The reason you should ban it—and the rules that you have to build in the marketplace—is, how do we keep it fair? It’s very practical. If it’s not fair, then people will stop participating. The message I always say is that there’s something nice about insider trading, which is that if the marketplace is really not fair, you can trust that people will just stop doing it. They won’t want to do it. That’s why we take this very seriously.

The Steelman Against Prediction Markets

Jack Altman

I have a topic I wanted to get your take on, because I can tell that you’re extremely thoughtful about fairness and the way it should work. What’s the better future? One of the discomforts people have with prediction markets is that they look like gambling. Some people are not comfortable with them.

It’s this new idea, and it looks like people just pulling their phone out and starting to gamble. Obviously that is not at all what your conception of it is. There’s all sorts of functions outside of that. But I’d be curious to hear your steelman version of, what’s the way this goes wrong? What’s the version of it that is—

Tarek Mansour

The bad version?

Jack Altman

Yeah. What’s the bad version of gambling that you’re not comfortable with? That you think crosses some line that you don’t think is good. Obviously, I think you and I share a baseline libertarian value that adults should be able to do what they want to do, obviously with some balance of we shouldn’t expose people to things that are short-term addicting and long-term bad for them. There’s some balance here. Where are you not happy?

Tarek Mansour

Look, I’ll tell you. I’m a risk taker. I’m a trader. I don’t consider myself having really gambled ever. I trade, I speculate. There’s a lot of similarities between these. There are a lot of arguments. The argument I hear most is… People talk about ducks a lot, like it “quacks like a duck.” That’s usually the argument. It looks like gambling, so maybe it is gambling.

It’s interesting, because the thing I always say is that that argument has been made about every single new type of financial market that has ever come to the US, or really anywhere. The argument has been made about grain futures, like we just discussed. When we started with life insurance back in the day, the headlines at the time were like, “Oh, this is morally horrible. You’re gambling on people’s lives. This is terrible. We should not have this at all.” Now I think a lot of us would agree we should have grain futures. We should have the stock market. We should have life insurance. We should have all these different things.

There is a basic… Yes, speculation has a flavor. It sometimes looks like gambling, but it doesn’t make it as such. I like this frame of, let’s actually play this out. How does it go wrong? In my opinion, the thing that ends up contributing to this bad perception in gambling is the incentive structure in the system. How is the system built, and what are the incentives built into the system?

When you think about a gambling business model, it’s a business model where the primary KPI—the thing that will not just predict your net income but will be pretty much equal to your net income—is your customer’s losses. If that’s your business model, that’s what your incentive is, what are you going to do? You’re going to promote—

Jack Altman

Losses.

Tarek Mansour

Losses. What else are you going to do? If you do a great job at stopping losses, you’re going to lose money.

Jack Altman

More throughput, bigger rake.

Tarek Mansour

Yes. It’s just inevitable. What a lot of these businesses do… If you’re sitting at a casino and you’re making money, what do they do? The bodyguard comes and takes you aside and says, stop. If you’re doing something informed, if you’re doing something smart, if you’re seeking information—the very point of financial markets—you get blocked. You get banned, or at least limited.

Jack Altman

Part of that happens because they’re trading against you. So in a casino—

Tarek Mansour

That’s the business model. Yes.

Jack Altman

Blackjack’s against the house. So you winning is exactly them losing.

Tarek Mansour

Exactly. Online casino, all these models, the counterparty is the house.

Jack Altman

Versus for you in a marketplace, you don’t care who—

Tarek Mansour

I don’t care. That’s fundamentally different. The way that it goes bad is when the house is trading against its own customers. Inevitably the algorithms—

Jack Altman

One thing that does persist though… Theoretically you don’t care if on net the two of them leave the day with more or less money between the two of them. You don’t care that two people are betting against each other.

Tarek Mansour

I’m neutral.

Jack Altman

You don’t care. Exactly. If they both start with $100, you’re okay. If at the end of the day one has $110 and one has $80, that’s still okay.

Tarek Mansour

I actually in some ways prefer if they’re both at $100. To me, it’s the incentive in the system. Going back to how it goes bad, if you’re the house, what are you going to do? You’re going to build algorithms. Whether it’s a physical algorithm… The casino has all these smart ways of figuring out who the big losers in the room are. You’re going to figure out how to get them hooked, get them to come back even when they’re losing. They know that they’re losing. You give them a suite, give them all these different things.

Jack Altman

Make the lights more flashy.

Tarek Mansour

All of that. The waitress comes in with a cocktail. That is where the unhealthy behaviors emerge. You have an algorithm that’s just promoting unhealthy behaviors. We’ve seen it in a bunch of other contexts, even tech platforms, et cetera. What I like about a free and open marketplace—and that applies to the stock market, it applies to crypto, it applies to options—is that that dynamic doesn’t exist.

What is my incentive as a company? My company takes a small fee, a transaction fee. So what I want is volume. I want people to just trade more. I’m actually incentivized. If I want people to trade more, I want the platform to be fair, and perceived to be fair. I want the platform to be neutral, as neutral as possible. I want it to be transparent, which is another key thing. All the trades are public, everyone can see what they do. I like this model significantly more, because when we think about what our responsibility is as a platform, I have a much better shot structurally at creating healthy feedback loops into the product.

We do this a lot. We have limits on how much people do, how much they trade, et cetera. But it’s not just something that we just say. Our business model is tied to it. If someone is engaging in excessive behavior and losing too fast, we as a business will not be hurt as much as the other types of business models if we tell this person, “Hey, maybe you should pause.” Now, I don’t know if it’s our job to block this person, that’s a different story. But all the incentives would say, “Hey, maybe you should stop. Maybe you should self-exclude. Maybe you should put limits on yourself.” Because again, they’re not losing it to us. They’re losing it to someone else, and that’s not a positive thing for me if that’s happening.

That’s what’s exciting me. I hope over time, not just Kalshi… Kalshi spends a lot of time thinking about customer protection in the context of how we limit unhealthy or excessive behaviors. I hope this gets applied to all the other financial markets where retail participation is going higher, whether it’s crypto, options, all these different things.

Jack Altman

Let’s say that what people were trading was just like stocks, instead of the outcome of an election or something like that. In that world, even with a fee, over 10 years of trading the stock tends to go up. Versus with an election, it’s just a trade back and forth with a little…

Tarek Mansour

Yes.

Jack Altman

So the outcome that you’re producing is not incrementally more net worth over time. The outcome you’re producing is better information and people being able to express their views.

Tarek Mansour

Yes.

Jack Altman

It does seem to me like it would be cool if you also had the other type of product where you were helping people—

Tarek Mansour

Like the investment-type product? There’s a difference between investing and trading, and that has always existed. Holding a stock for five years, that’s investing. If you trade a stock in and out over the next few days, that’s trading.

Jack Altman

You’re going to get crushed by all the fees.

Tarek Mansour

Not just fees, also your directional view.

Jack Altman

It’s not enough time.

Tarek Mansour

Yeah, you’re trading. That’s a zero-sum game. Options are a zero-sum game. Crypto, in my opinion… We’ll see over time, but most of crypto trading… If you hold Bitcoin for five years, that’s investing. But if you’re trading Bitcoin in and out, you’re zero-sum.

My mental model for this is, yes that’s true. But it’s interesting, because we ask a lot of our customers, “Hey, do you trade?” Not invest. They’re different. “Do you trade, for example, S&P, or do you trade traditional options?” Consistently, for nine out of ten of our customers, their response is no. The reason is, “I don’t gamble.”

In people’s minds, elections trading or betting sounds more like gambling than trading options, because that sounds financial. But actually, if you ask people, it’s “I don’t have a way to win an option. I don’t have an edge. There is no way for me to do it.”

Jack Altman

Those markets are so efficient.

Tarek Mansour

They’re efficient. The hedge funds have way more information than I do. There isn’t a way for me to be truly informed. If I put in a lot more research. So the whole point is, if you put in a lot of research, can you get better and can you win? The reality is, in a lot of traditional markets, the answer is no. Wall Street will always beat Main Street. Wall Street will always beat above the average person. The beauty of what we’re building is that it’s just not the case. The average person is winning more than Wall Street. Our best inflation forecaster is not a Wall Street person.

Jack Altman

I guess by definition the average person is neutral with you, because there’s a buyer and a seller of everything.

Tarek Mansour

But it’s more the point that there isn’t that structural advantage that Wall Street has in our markets.

Jack Altman

What I would argue is they might be neutral with you, and they’re definitely going to be negative if they try to trade against Citadel or something like that.

Tarek Mansour

Generally, yes. Our average user is neutral, but I’m talking more about—

Jack Altman

The people who want to put in real work.

Tarek Mansour

Yes. If you put in real work in figuring out how people vote on bills, or… Back in the 2024 election, there’s the guy who put a lot of money on Trump because he did the neighbor poll. It’s amazing. That’s the markets working exactly how they should. They’re rewarding someone going out there doing the research and doing the truth-seeking on behalf of society. You get rewarded for it. You’re doing a reward mechanism for someone to do research, which does not exist in a lot of the traditional markets.

That’s why when you talk to these people that are on Kalshi… I don’t know if you saw the New York Times article about the rise of the prediction market trader, that class of people that are doing this as a full-time job. They’re excited about this because it’s a way for them to get rewarded for all the things they are learning about the world.

Hedging and Institutional Adoption

Jack Altman

By the way, one of the things that I think is very interesting is whenever there’s a new financial product, there are all these emergent behaviors and properties. An example with yours is insurance and hedging and things like that. When I first learned about that, I was like, “Oh, that’s surprising, but it makes sense with a hurricane or something like that.” It’s getting used for those types of things too, right?

Tarek Mansour

Yes. The trajectory over time is that this is becoming an increasingly bigger part of the platform. Obviously we started with retail—people, individuals—but now as we’re getting into the institutional side, that’s becoming a bigger and bigger piece.

Let me talk about retail, then let’s talk about institutions. There are two functions of the market. One is what we call price discovery, which is predicting all these events. That’s one of the benefits of prediction markets. You are giving people an incentive to do the price discovery, which is to predict all these events. That’s working. I think a lot of people now at least understand it increasingly more. I don’t know if you saw the Fed paper that came out, you saw that?

Jack Altman

Yeah. It’s cool.

Tarek Mansour

“The Rise of Macro Markets”. The Fed itself is saying this is the best gauge we have on the economy.

Jack Altman

It’s crazy.

Tarek Mansour

It’s amazing. By the way, it’s not Wall Street. Again, it’s Main Street. We’ve figured out how to build this community of people dispersed across America that are making us smarter about the economy.

Jack Altman

It’s like, it turns out that if you ask a big enough crowd of people how much a particular cow weighs, they get really close.

Tarek Mansour

That’s the OG original prediction market.

Jack Altman

Yeah. It’s pretty cool.

Tarek Mansour

That’s how it started. Literally, you bring in the wisdom of the crowd.

Jack Altman

This happened with the elections too, with Trump and stuff like that. Everybody’s like, “No, Trump won’t possibly win” and maybe…

Tarek Mansour

If you have an incentive to actually do the research, I think you may actually do it.

The second prong is hedging. Hedging is a little different from insurance. Insurance is usually regulated at the state level because there’s also a house. So you go to an insurance company and they give you a price. Hedging is on the open market.

Jack Altman

So hedging is just, “I’m on a coast and I’m going to bet that a hurricane is going to come and knock my house over.”

Tarek Mansour

Yes. But the key thing is it’s an open and competitive market. You say, I want to buy X amount of something that protects me, and then people can fill you at whatever price and they compete for that price. We see this a lot. For example, in Florida in the Keys, insurance companies have pulled out because they don’t know how to price hurricane risk anymore. It’s really expensive. So we get calls—

Jack Altman

As of when?

Tarek Mansour

It’s been like two, three years. We get a lot of calls around hurricane season where people are like, “Hey, I want to buy X amount of hurricane hitting this town. I don’t want to deal with the insurance process. Oftentimes they don’t pay me back. There’s deductibles, there’s all this. I just want it so that if the hurricane hits the town, I get paid.” That’s a hedge. That’s one really clear use case that we’ve seen. The other one is the time with Biden and the forgiveness market. A lot of students were hedging, smoothing out their student loans. They were super worried about having to pay back.

But the interesting thing about the vision long term is we’re now seeing a massive acceleration in institutional adoption of prediction markets and Kalshi. Think about it this way. You own S&P as an institution, but you’re really worried about an upcoming election. You’re really worried about the midterms one way or the other. If the Republicans win, or Democrats win, you think it’s going to impact your portfolio in a certain way. Today, you don’t have any options. You may just have to sell your position before the event happens.

If you want to protect yourself with prediction markets, you can actually put on the hedge. So if you’re worried about, for example, Republicans winning or Democrats winning, you can buy Republican or Democrats. If you think that’s going to impact your portfolio, your hedge is going to basically compensate for that. You don’t have to sell your position anymore, you can put on the hedge. That’s where the next generation is: AI, COVID, elections, bills passing, regulatory changes. All these different things can become insurable risks. What Kalshi has provided for that is the layer one of being able to think about those, research them, and price them.

Any of these risks now we can put on the platform. We basically have all the top super forecasters on the planet that will give you the price. You send this thing to the system and it’ll come back and spit out, “Hey, will the Citrini scenario happen?” I don’t know if you read that. Have you seen the research report from Citrini?

Jack Altman

Oh, Citrini, yes.

Tarek Mansour

Yeah. We put it on Kalshi and it started at 11%, now it’s at 33%. This thing has gone up. It’s amazing because you have a market that you can probe now instead of listening to different pundits and people battling on Twitter.

Jack Altman

And then based on that, if you believe that, then you can go do other trades against that, I suppose.

Infinite Markets

Tarek Mansour

You can either use that to hedge if you’re worried about that impacting your portfolio. Or the interesting thing is, pricing this thing can enable us as a society to make the prices of all of our traditional assets better. Now, there is this theory about infinite markets. Have you ever heard about that?

Jack Altman

No.

Tarek Mansour

The idea is that as society gets increasingly more complex, the number of dimensions that matter for asset prices increases. A hundred years ago, you maybe needed to understand supply and demand, industrial labor, and maybe the agricultural economy in the US. Now you have to understand those things, and you also have to understand what’s happening in Iran, what’s happening with COVID, AI and what it’s going to do, how technology is rapidly progressing, cyber, all these different things. Society is just getting increasingly more complicated and more interconnected. So everything impacts everything.

The interesting thing is, as the number of dimensions increases, our pricing of traditional assets like the S&P or home prices, the entropy there goes up. We have less and less of the relevant information. So you have to, over time, price all these different dimensions so that you can then price the S&P more accurately.

One of those dimensions, for example, is this Citrini report, what will happen with AI, what will happen with COVID. That idea of infinite markets is very tied to prediction markets, because prediction markets fill that gap. Prediction markets can actually price all these different things, and if you get smarter about all the sub-components, then you can be smart about the actual component.

If you want to price Tesla stock, you have to price whether Elon is going to leave, whether they’re going to over- or underdeliver on deliveries, how fast autonomous vehicles are going to come around, all these different questions. Prediction markets can price all these different factors that then feed into the stock price. It’s very important for us to keep being smart about resource allocation over time. Otherwise, our model of the world is going to just get worse, get less smart.

Staying Lean

Jack Altman

As for the last topic I’m interested in, I didn’t realize until chatting with you that your company is small relative to the scale you’re at. You’re not much over a hundred people.

Tarek Mansour

Yeah, we just hit 127 now.

Jack Altman

So how does that work? That is very small relative to what you’ve accomplished.

Tarek Mansour

What’s interesting about it is that we didn’t sit down proactively and write a doc about how we were going to build a small, lean company. It just happened.

Jack Altman

Did you do any particular other things that this was a byproduct of?

Tarek Mansour

Yeah, I think a few things, and I’m not 100% sure. I’m still figuring out why all these other companies are so much bigger. I’m still trying to figure out, am I missing something?

One is, Luana and I work very hard. Very hard. Until today, we really had a chip on our shoulder. We’d like to think we’re the underdogs. What I learned over time is, if you look at the kind of… We’re generally first in, last out of the office, and work on weekends. I think the output per person in the company is heightened because the leader is really on the frontline doing a lot.

Number two, we have a lot of direct reports.

Jack Altman

Like how many?

Tarek Mansour

There’s not really a managerial layer in the company yet.

Jack Altman

It’s like a hundred?

Tarek Mansour

If you ask Luana what maybe 80-85 of the people in the company today are doing, she knows because she probably checked with them on Slack in the last 48 hours. The rest is maybe me. Well, there’s a chunk of people where you don’t need to know what they’re doing. You know that they’re just doing. You’ve got to let them cook. So that’s number two.

Number three is, we don’t think about org charts much. I don’t know how that will scale. We’re still thinking about that. But we keep dynamically listing, “Here are the top X problems of the company today, and who do we have on those problems?”

Jack Altman

And people move between problems? Do people self-organize to the problems?

Tarek Mansour

Yeah. It’s like cells in an organism. You know how, if you get cut, your cells will just come around the cut and do their thing? It’ll be a bit like that.

Jack Altman

I mentioned to you, I really want you to read the Valve Employee Handbook.

Tarek Mansour

Yeah, I’m excited about reading it.

Jack Altman

It’s very good.

Tarek Mansour

But it just sort of happens, and it’s making sure there’s as few constraints or bottlenecks to that sort of self-organization happening as possible.

Jack Altman

Is this what people expected when you hired them? Did you hire types of people that you thought could only function in a place like this? How did you end up with that culture, when it’s what I would describe as extremely uncommon?

Tarek Mansour

We don’t have all the answers, obviously. One is, we do bias on slope versus intercept, because people who have an intercept, I think generally can land in this culture and be like, what on earth is going on? This is crazy. That’s just happened. We’ve had this happen.

Jack Altman

Someone who’s used to a big, more structured organization comes in—

Tarek Mansour

Or not even big, an organization that’s just structured in a different way. They show up and they’re like, this is crazy. This is complete chaos. Because it looks like an organism where these organisms are moving around. Slope is, they don’t know, they’re just super smart, very high agency, they don’t even think about what’s happening. They just think it’s normal. That’s one.

Number two is, I always say Brian Chesky put it better. I didn’t verbalize it until he put it into words, but we don’t manage people, we manage work. People that just generally have high agency, we never have to check on whether they’re doing something. Sometimes we have to reorient a bit, “Hey, this is not actually that useful, we should do something else.” Or be very much in the details of what they’re doing.

Jack Altman

It’s the work, not the people.

Tarek Mansour

They’re just doing stuff. They have this sort of high agency, I want to always be doing something. And I bias honestly toward execution over strategy.

Jack Altman

Me too.

Tarek Mansour

I really do. Look, strategy is hard, but what I’ve found over time is the natural next step for a company is generally natural. You know what I mean? For a public company, for example, the CEO lays out a strategy, it’s—

Jack Altman

It’s not like, what should we do? It’s, can we do it?

Tarek Mansour

Most of the time.

Jack Altman

How quick can we move? And all of that.

Tarek Mansour

Most of the time.

Jack Altman

Periodically there’s probably a non-obvious strategic decision that the founder needs to make. But that’s probably a couple times a year kind of thing.

Tarek Mansour

Yes, max, and it’s usually a little bit longer horizon than a year. So I think of our role, Luana and I, as, at a very high level, are we directionally in the right direction? What are the big risks in the next three to four years? Make sure that we are thinking about those and executing against those. I really mean three to four years. I’m pretty paranoid, again from my time from Lebanon. I always think, “What is the thing that’s going to go wrong in three, four years? Let me work through that.”

And then very much in the details. I literally am often in specific copy in the product. A lot of it Luana and I wrote, still to this day. Or even ads, we get into the copy, is this good? Very specific things. Everything in between, we try to not spend any time on, which pushes other people to not spend any time on it. Sometimes there’s a subset of people that doesn’t work well for.

Jack Altman

And then people can just opt out.

Tarek Mansour

Basically. There’s not a clean solution, building a company is hard. But a lot of people like it. They just don’t want to be managed.

Jack Altman

Are you going to be able to keep the company small even though you’re scaling fast and everything? Small as possible as at least.

Tarek Mansour

I really hope so. That’s one of the worries I have. I think about this a lot. That’s one of the worries we have. I would say maybe the trade-off… People sometimes walk away with, “Oh, this is a perfectly run company.” The answer is, no, not at all. The trade-off is usually, I think we take on more organizational chaos. Does that make sense?

To me, there’s a bit of a decision you make as a company. Either you’re more chaotic, or you have more process, which means bureaucracy and some degree of slowness. Kalshi is very comfortable with putting something out there and getting bashed for it, but three, four weeks later it gets much better. Then you’re much better than if you had waited two months. We’re very comfortable with that.

Jack Altman

That’s great. Tarek, this is super fun. Thanks for your time.

Tarek Mansour

Thanks for having me. This is awesome.

Max Mullen is the co-founder of Instacart and an active investor having invested in 100+ companies including Gumloop, Mercury, Owner among others. He also runs a founder community in San Francisco called Workshop.

We discussed the full arc of building Instacart from a contrarian idea that investors rejected to a $10B consumer marketplace. Max highlighted the scrappy early days, marketplace product-market fit, and key inflection points like retailer partnerships and the Amazon–Whole Foods moment. We also explored what makes great consumer founders, why the best ideas look wrong at first, and how to build and scale in “hard mode” markets. Finally, the conversation touched on investing, decision-making frameworks, and what it takes to win in consumer over the long term.

Timestamps:
(0:00) Intro
(0:36) The inception of Instacart
(4:55) Finding product market fit
(7:20) Landing Trader Joe’s
(11:04) Big levers for growth
(13:36) Operationally complex businesses
(14:55) Amazon’s acquisition of Whole Foods
(17:50) COVID and Instacart’s IPO
(20:02) Prioritizing profitability
(23:21) Avoiding temptations
(24:59) The future of Instacart
(25:53) Investing in consumer
(28:21) Irrationally optimistic founders
(29:49) B2B vs consumer founders
(30:35) How to work with investors
(33:38) Building Workshop

Links:
https://x.com/Max
https://maxmullen.com/

Watch on YouTube; Listen on Apple Podcasts or Spotify

Subscribe now

Clips

Prioritizing profitability

Such a good story about how Ravi Gupta helped Instacart focus on profitability when he was COO.

At an all hands he said "we okay we can spend $25k a month on blue bottle, leasing teslas, acquiring 5,000 customers, or 1,000 shoppers.

Raise your hand if you want the blue bottle!"

The Whole Foods crisis

Never let a good crisis go to waste.

One of the scariest moment's in Instacart's history was when Amazon bought Whole Foods...their biggest competitor buying their biggest client.

Max tells the story of how they locked in (before locking in was a term) and made it an advantage.

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

Instacart’s Origin Story

Jack Altman

All right, Max, I’m very excited for this one. I love doing this with close friends, as we’ve had some other ones on the show. One of the things I was just sharing to you is we’ve hung out a million times and we barely talk about work. I barely know what you do. So I’m excited to learn about your work along with the rest of the audience.

Max Mullen

Thank you so much for having me, Jack.

Jack Altman

Let’s start with Instacart, because you obviously just completed the end-to-end dream of any entrepreneur. And then I want to go into your investing and some of your other work. But starting with Instacart…

I don’t even know all these stories, which I really should, given how much we’ve hung out. Can you talk about Instacart getting started? The early days, the idea coming together. I know this is YC, back in 2012, right? So tell me about the beginning.

Max Mullen

I’m so fortunate to be a founder of a consumer company because it’s a household name and everybody knows about it.

Jack Altman

And I use it like seven times a week. Or more.

Max Mullen

You really do order a lot.

Jack Altman

You probably know what I eat too.

Max Mullen

I do not look at customer accounts.

Jack Altman

Could you if you wanted to?

Max Mullen

I can’t, no.

Jack Altman

You probably could.

Max Mullen

But what’s great about being a consumer founder is that everybody knows what you do. You don’t need to repeat yourself anymore when you’re pitching the company. That wasn’t the case in the early days. In 2012, grocery delivery was basically something that didn’t exist in the US. It was quite a contrarian idea back then to have an app.

Jack Altman

Actually it’s even more contrarian because didn’t people try it in Web 1.0 and it was a big, highly-funded failure?

Max Mullen

Yeah. There were some spectacular failures in the dot-com era.

Jack Altman

Like hundreds of millions went in and it didn’t work.

Max Mullen

Yeah. Sequoia invested over a billion dollars in a company called Webvan and it failed. That was 10 years earlier, before we started.

Jack Altman

So did you have that when you were talking to investors? Was that the big thing? Like, “This has been tried, it doesn’t work.”

Max Mullen

Yeah. That was the elephant in the room. Most investors totally turned us down because they thought that it would not work again.

Jack Altman

So what changed?

Max Mullen

Okay, so a bunch of things changed, obviously, from the dot-com boom until 2012. First, more people were on the internet and those people were more accustomed to e-commerce. In 2012 there was lots of e-commerce going on, but nothing in the grocery industry.

The other thing that changed is that we had smartphones. On the supply side, the shoppers could have a smartphone that could help them do this work and had GPS and could help us make this an efficient marketplace.

Jack Altman

The shopper’s part was the key. I think a lot of people think about it as, “Oh, I’m going to order from my couch on the phone,” but it’s really the shoppers who are in the store needing the application.

Max Mullen

Yeah. The idea of using stores as warehouses was also new. Most people who had tried to do grocery delivery tried to build big warehouses, buy trucks, and it was very expensive. We didn’t do any of that. We just went into the same grocery store that you would and shopped just like you would and delivered.

Jack Altman

Obviously this was hard to raise money for, but you still got into YC. You were still able to raise capital. But then you still had to start a marketplace and you still had to get… apples. So what did you do to actually get this thing started? Day one you had nothing. Day two, what did you start doing?

Max Mullen

We always had the company launched from almost day one. So we had a not-very-well-designed app and a not-very-well-designed shopper experience, and we just put one foot after the other trying to build from a very small base of customers to a little bit larger and a little bit larger, and tried to pay attention to both the demand side and the supply side at the same time.

Jack Altman

So who’s the very first customer? Or what is their experience?

Max Mullen

Honestly, the very, very early customers, a lot of whom were our YC batchmates, probably placed orders that never arrived or were really late or didn’t contain all the items. It’s a human business. There’s a lot of processes involved and mistakes, and every week we would try to make these metrics go up.

Percent of late deliveries would go down, number of deliveries per week would go up, the percent of your items that were delivered perfectly—found rate—would go up. We would every week try to push those metrics up and just make little tweaks to the software to make that happen.

Jack Altman

Did you ever shop?

Max Mullen

I still shop.

Jack Altman

Really?

Max Mullen

Yeah. I still have a shopper credit card.

Jack Altman

But you go fulfill orders sometimes?

Max Mullen

Occasionally, yeah. It’s really fun and it’s super hard.

Jack Altman

Is it hard?

Max Mullen

It is really hard, yeah.

Jack Altman

What’s it like?

Max Mullen

First of all, when you’re shopping for yourself in the grocery store, you know exactly what you want. If something’s out of stock, you just make a quick replacement and you’re good with it. But when you’re shopping for someone else, it’s hard to understand what their intent is.

Jack Altman

You also don’t know if they’re going to be happy with the different chips or if they’re going to be really pissed because they wanted lemon lime.

Max Mullen

Or do they want a bigger size of the same brand or a smaller size of a different brand.

Jack Altman

Yeah. It’s a judgment call.

Max Mullen

Yeah.

Jack Altman

But then, you can ask questions in it.

Max Mullen

You can. Sometimes customers are really responsive, sometimes they’re not.

Jack Altman

So you get all of these initial pieces going, you start improving it consistently.

Max Mullen

Yeah. Very importantly, I was doing all of the customer support myself. Customers would call Instacart’s phone number and it would ring my phone. So the pain of anything that was wrong with our service was personally felt by me, basically seven days a week. And then I would go and make the roadmap and fix those problems so that I didn’t have to get those calls anymore.

Jack Altman

How pissed do people get? Is it an emotional thing for people or is it like, “Hey, my burgers aren’t here”?

Max Mullen

It really depends. Every customer’s different. Sometimes people are buying things for their office. They’re more chill. If you’re buying a rack of lamb for dinner and it needs to arrive before five, otherwise your dinner’s going to be late, then you’ll be really upset if it doesn’t arrive.

Jack Altman

Actually, later I’m going to want to ask you about fast delivery and some other adjacent markets that I know you’ve thought about and done work in. But I’m still interested in how you actually got this consumer marketplace going, because they’re so hard to get going.

Did you feel pull immediately, or was it the kind of thing where in order to get strong product-market fit you needed to add suppliers and selection, and it didn’t actually cross until you had more and more products in the catalog?

Max Mullen

My belief is that product-market fit is a spectrum. It doesn’t just happen in one moment. In the early days of Instacart, we sort of thought we had product-market fit. We had a lot of pull from customers who wanted deliveries of groceries that were quick, but they didn’t really care from what store. Our initial product was basically all coming from one conventional grocery store in San Francisco.

But real product-market fit was really from families, and that only happened later when we started adding retailers and their full catalog to the platform.

Jack Altman

Why was that important?

Max Mullen

You don’t want to buy groceries from a warehouse. You want to buy groceries from Sprouts. Or from Bi-Rite Market. You have a really strong loyalty toward the grocery stores that you already shop at and you want to get delivery from those on Instacart.

Jack Altman

How did the business itself work in the early days? I imagine it could not have been great margins when you were getting going, because you couldn’t charge $7 for an orange, but you still had to send somebody to go get the orange and bring it and all of that. Were you running on a wire at the beginning? What did it look like at first?

Max Mullen

To be quite honest, at first we weren’t very good at tracking our unit economics. We were definitely losing money, but it was a little bit unclear how much money. Our primary goal was just to get more deliveries and higher quality deliveries and more customers. We knew that we could achieve positive unit economics later, but it would take a lot of work and bigger scale.

The Trader Joe’s Story

Jack Altman

Zooming forward a little bit, were there landmark partnerships, grocery store deals, that really inflected the business? Could you talk through an example end to end?

Max Mullen

The first thing is that we didn’t know how important retailers were. In the early days, we asked our customers, “What could we do better? What could we do differently?”

Jack Altman

Because at first you were not shopping from a grocery store.

Max Mullen

We were always shopping from a grocery store, but at first you went on Instacart and you saw a catalog. We did not tell you where the groceries were going to come from.

Jack Altman

“I want some strawberries, where are they from?” And you’re like, “Don’t worry about it.”

Max Mullen

Our idea was going to be we’ll get them from the cheapest, closest store. People won’t care where the strawberries come from. So we asked our customers and they told us, “We love Trader Joe’s. We only want to shop at Trader Joe’s.”

So we went on this mission to try to figure out how we can partner with Trader Joe’s. We couldn’t get in touch with them. We tried everything, and at a certain point we went to the store and we looked around and said, “Maybe we can just shop out of a Trader Joe’s without a partnership.” In order to do that, we would need a picture of everything that they sell.

So we asked the manager, “Can we get a picture of everything that you sell?” They said, “Absolutely not. We don’t have that. We can’t give that to you.” And I said, “What if I took my own pictures? I’ll do it in the corner of the store, or let us take some items out of the store into the parking lot and we’ll take some photos and we’ll bring them back.” They were like, “No, no, no.”

So we came back and we said, “What if we bought one of everything in the whole store?” They were like, “That would be great. Come on a Thursday when it’s slow.” So I said, “Okay, great. We’ll be back on Thursday.” I went to that store with a bunch of other people over three days, and we bought one of every product in the entire Trader Joe’s.

Jack Altman

How much was that?

Max Mullen

$20,000.

Jack Altman

That’s okay.

Max Mullen

Not too bad. We had just raised the money from Demo Day, so we had a couple million bucks in the bank. We ran this experiment. We made this catalog of every Trader Joe’s item. We launched it on instacart.com.

At that time we had to add a toggle. So now instead of seeing no retailer, you would see Safeway or Trader Joe’s and you could switch between them. That was the moment I think we started to really find marketplace product-market fit.

Jack Altman

That’s interesting. It’s crazy. Airbnb had something similar where once they got good photos… It was worth it to them to go do super manual things apparently.

Max Mullen

You have to roll up your sleeves and go do these crazy things to get the first customers to be really excited, to tell their friends, to get the next set of customers, just to get one city going.

Jack Altman

Once you had that understanding, did you then shift a bunch of the company focus to going and getting more retailers?

Max Mullen

We did this with Whole Foods and Costco and a bunch of other retailers. Of course we eventually got to the point where we struck partnerships with those retailers, and then they would give us their catalog data, or they would at least let us in their stores to photograph it carefully.

Jack Altman

What was the argument that you needed to convince somebody like a Costco to serve products with you?

Max Mullen

We’re a few people in San Francisco, we’re a startup. No one’s ever heard of us, so it’s tough to strike a partnership with a really big public company.

Jack Altman

Because also, I assume the deal is, “We’re going to come buy from you, maybe we’re going to cannibalize some of your online sales.” I don’t really know how the math works out, but I assume that there might be some idea of them thinking, “No, I should just own this channel directly, if I can.”

Max Mullen

Honestly, back then it was more a lack of awareness. Retailers didn’t understand how important e-commerce was going to become. They didn’t have a good strategy yet. In fact, retailers pay Instacart a commission for bringing them growth.

Jack Altman

So at some point that flipped where you’re like, “Hey, I’ve got the traffic.” Now you can command a different sort of price dynamic.

Max Mullen

At first we started with little local retailers, Bi-Rite, Rainbow Grocery, right over here. They were thrilled to partner with us, and then eventually we got to the bigger Whole Foods Markets of the world.

Growth and Geographic Expansion

Jack Altman

What were your levers for growth? It sounds like adding retailers equals more growth in general. What else were the big levers? I’ve got to assume price.

Max Mullen

Geographic expansion. Geographic expansion was another big one. We learned how to launch new cities. We launched Chicago, we launched Boston, we launched Washington DC, we launched New York City.

Jack Altman

How do you launch a city?

Max Mullen

Oh man. At first I just went there with an engineer and we would catalog the stores, make sure that our operations were set up correctly to understand the borders of the city and the zip codes that we could serve efficiently. We’d hire shoppers and hire operations folks to get things going on the supply side, and then we’d do demand-side marketing and try to match those and grow those.

Jack Altman

What worked?

Max Mullen

In 2013, when we first launched the first city outside of San Francisco, it was Chicago. Luckily I had a girlfriend there who’s now my wife, and she was going to business school. So we got all the business school students, all the MBA students at University of Chicago to become customers.

They told their friends, we threw events, we did PR. There was something novel. There still is actually something novel about putting in your grocery list on an app and then in an hour it all just shows up.

Jack Altman

I get a rush every time.

Max Mullen

And so we would try to use that.

Jack Altman

You know what I’m ordering?

Max Mullen

Ice cream.

Jack Altman

Yeah. See, that’s what I told you. That’s what I thought.

Max Mullen

I don’t judge.

Jack Altman

So there’s geographic expansion. Was price a big lever? Was it the kind of thing where you’re like, “I change these prices.” Am I playing with that tool carefully or is it not that big of a deal?

Max Mullen

Retailers set prices, but we would make delivery free. We offered an annual membership that we discounted and would give free trials of, Instacart+.

Jack Altman

Did you ever do referral programs?

Max Mullen

Absolutely. In fact, I designed this killer referral program that was like a third of our traffic in the early days.

Jack Altman

When I first moved to San Francisco in 2013 or something like that, I was doing these crazy Uber referrals. I was deep in there just doing paid marketing for Uber to get more drivers and it was great.

Max Mullen

Just for fun.

Jack Altman

No, I got Uber credit. It was great. I think they stopped it at some point, but it was great for a little while.

So you had those referral programs going for shoppers? Or for customers?

Max Mullen

The key thing we figured out is that after your first order, right when you placed it but before it was delivered, you were really keen to share the service with other people. So we would have this “give $10, get $10” offer, or we would change those values to play around with them and experiment. That got a lot of people to share with their friends.

Jack Altman

When I think about the overall story of Instacart, obviously you needed a nice piece of software. But a lot of this is building a business in terms of partnerships, business development, the hard work of city expansion, boots on the ground, hiring people. Is that common, do you think? Do you think a lot of consumer marketplaces require these other components besides just the technology more than B2B companies?

Max Mullen

There are some consumer and some B2B marketplaces that are what I call operationally complex. Ours is probably hard mode, extra hard mode. If you think about it, there’s the consumer app, which of course you know as a consumer who orders a lot of ice cream. There’s the shopper app. They have to have an app that’s beautiful and works really well and is performant in low-WiFi situations in the back of a grocery store, and has all the photos of all the items.

We have a huge ads business. We’re partnered with almost every consumer packaged goods company in the US and in Canada. Then we have the retailer component. We’re delivering enterprise-grade software to retailers.

And we have a logistics system that routes and batches orders, and we have lots more stuff, analytics. There are so many facets to the business. That’s uncommon. A lot of the business models that you and I invest in are pretty much the SaaS business model or AI applications, a lot less complicated. So I think it’s not for the faint of heart to try to build such a complex business.

Amazon Buys Whole Foods

Jack Altman

Talking about other hard-mode moments, Whole Foods was obviously a big customer of yours. I remember one day I was shopping with Whole Foods and then one day we’re not. Can you talk about what happened there, what it meant for you, how it affected the company?

Max Mullen

So the company’s chugging along. We’re signing retailers and we signed this big long-term deal with Whole Foods Market, which is not the largest retailer but a really important one from a brand perspective. Seven in the morning, I get woken up one morning in 2017 and we find out that Amazon has bought Whole Foods.

Now, Amazon is our biggest competitor. They’re really focused. They have been working on online grocery for decades, and they have essentially infinite resources. Whole Foods Market is our biggest client in terms of the number of orders that we send them. So this is an existential crisis for the company.

And then the headlines started coming out. “Amazon buys Whole Foods for $13.7 billion.” “Amazon buys Whole Foods. What does it mean for the grocery industry?” “Amazon buys Whole Foods. Will Instacart succeed or fail?” “Amazon buys Whole Foods. Instacart’s toast.”

We were kind of freaking out. So what do you do? What do you do when you get hit with something like that as an early company? We had an all hands and we declared wartime. We realized that this was going to be not a terrible thing for the company, but a dynamic situation we could make the most of.

Every other retailer saw this news as well. They were asking questions like, “What is our e-commerce strategy? What are we going to do now that Amazon has entered our industry?” And we used that to our advantage. We reengaged with—or they reengaged with us—almost every retailer that we hadn’t signed yet.

Jack Altman

You’re arming the rebels.

Max Mullen

Yeah. And we really used that wartime crisis moment inside the company to motivate people to work extremely hard and extremely fast, and with retailers, to get them to finally come aboard. In the 18 months after that happened, we signed basically every major retailer that had been a holdout, including Costco and Kroger and others.

Jack Altman

And you think those wouldn’t have happened without it?

Max Mullen

Certainly not on that timeline.

Jack Altman

So then the net effect might have been positive.

Max Mullen

Absolutely. It was one of the best things that ever happened to the company. One of the scariest things.

Jack Altman

It’s a good reminder that you can’t always know whether some piece of news is good or bad.

Max Mullen

One thing’s for sure. If you start a company and it takes a really long time to build it, you’re going to face luck of some kind—good luck and bad luck—and great companies figure out how to take those moments and flip them and leverage them.

Also, when things that could be potentially bad for the company happen, you’ve got to have a thicker skin. You’ve got to become anti-fragile. For sure, Instacart is what I would call an anti-fragile company. Things happen and we don’t get worse. We don’t stay the same and just repair, we get stronger. People get emboldened and we get galvanized and we go off and do amazing things.

COVID and the Road to IPO

Jack Altman

Another one comes to mind. It’s a champagne problem. Instacart’s a $10 billion public company, which is a remarkable achievement by any standard. There was one venture financing that was at $40 billion. With a lot of companies, when that happens, it ends up killing them and they can’t get through it and it creates all these issues. But you got through it, you got public, you’re now a public decacorn, and that’s amazing. So at some level, that’s okay.

Can you talk about that journey too? Because I’m sure that didn’t feel good at every moment. There were probably some cultural things you needed to work through and all of that.

Max Mullen

It starts at the beginning of COVID. COVID happened. Our business took off.

Jack Altman

It went nuts.

Max Mullen

We grew 4x in 2020. We were suddenly remote and we had to scale the company. Even with hiring more people, everybody was working seven days a week, two standups a day, just trying to keep the business afloat because there was so much demand.

Jack Altman

Talk about a COVID beneficiary. People just not wanting to go to the grocery store…

Max Mullen

Even my own parents, obviously they’re super fans of Instacart, but they were using Instacart sometimes and going to the grocery store sometimes. And then during the pandemic they completely switched.

Jack Altman

And then you build a habit. It lasted long enough that people built habits. You acquired users.

Max Mullen

And they’ve stuck around. We’ve never had a down year. But that’s a challenging thing, not being able to forecast what the next year and the next year were going to look like. Especially during 2021, the way the markets were, our valuation went up and down and the whole thing looked like a roller coaster.

It’s emotional. People get attached to the value of their shares. People thought that our IPO timeline was going to be one thing, and because of the markets that had to shift and happen later. We had to manage through all of that.

Also, it was a new era for the company. Up until that moment, almost everyone that joined the company was joining a company that wasn’t yet really a household name. You kind of had to squint to believe that we were going to do all the crazy things that we said we were going to do and achieve the scale that we said we were going to achieve.

After COVID, it was pretty obvious. Instacart was on a great track, and so different types of people were attracted to the company at that point. We had to manage through the changing culture that was necessary there.

The Path to Profitability

Jack Altman

Obviously now you’re a profitable company. At the beginning you talked about, “We didn’t even know what our margins were.” Let’s just pretend they were definitely super negative. When did you go through that cultural journey of “this is going to be a profitable business now”?

Max Mullen

Two and a half years into the company we raised a round of financing that valued us at around $2 billion. That was sort of the beginning of us growing up as a company. We hired this guy, Ravi Gupta, who then became a partner at Sequoia and is still on our board. He was the first… adult in the room, let’s say. After a few months of joining—actually really after a week or two of joining—he looked at our financials and he was like, “Guys, I don’t know if you know this, but we’re losing a lot of money on every order.”

We were like, “Yeah, we know. But how much money are we losing?” We quantified it and we realized that as good as things were going, the company was growing very fast, and if we grew as fast as we were growing—

Jack Altman

All the money was going to be gone.

Max Mullen

We might run out of money. It was epic, but Ravi had this all-hands at Instacart in his first few weeks. He put up a slide and he said, “Okay, we spend $25,000 a month, let’s say, on Blue Bottle Cold Brew in our fridge. For that amount of money, we could lease a Tesla for the company. A few Teslas, right? We could have a fleet of Teslas. That’d be cool.

Or for that amount of money, we could acquire 5,000 customers, or we could acquire a thousand shoppers.” He asked people to raise their hands. “Who wants to acquire the customers? Who wants to acquire the shoppers? Who wants to buy a Tesla? Or who wants to have Blue Bottle coffee?”

Of course everybody realized that the company was probably spending too much money on some silly things. So we made some changes. We cut some things like that. More importantly, we taught the company this object lesson about being more resourceful.

Jack Altman

So what went into that from there? That’s a moment where you galvanize everybody and you’re like, “Hey, we care about this now.” But what do you need to change besides the Blue Bottle?

Max Mullen

Not buying Blue Bottle coffee, as painful as that was, was the object lesson. But then the attitude we all had to have was, we all own some little slice of our P&L. This team works on taxes. That team works on bottle deposits. This team works on batching efficiency. Everybody was responsible for 5 cents, 25 cents, $1 of the bridge from negative $15 of unit economics to neutral gross margins.

We had to do it fast, because otherwise we would literally go out of business. That put this really big pressure on all of us. It was hard. We had a lot of arguments about what to cut and what not to cut. Every team, everyone in the company was involved in this initiative. We set a goal to become gross-margin profitable.

We started to make little bits of progress towards it and then big wins would happen. We would figure something out. We would change prices in this city that was more expensive. We would take away some marketing thing we were doing that wasn’t working. We slowly got the company margin positive.

And then we threw this wonderful party, which everyone who was there remembers. We threw a very resourceful party. We didn’t spend any money on the venue. We had it in our office. We just turned on the music, and then we got dollar hamburgers from McDonald’s. So we got 300 $1 hamburgers and very cheap champagne from Costco and we just had this big, huge celebration of this crazy win as a company.

Jack Altman

I’m also curious about some of the decisions that you decided not to do. In these retellings of history, it’s easy to focus on the amazing decisions you did make. There’s also a lot of decisions you actively decided not to make that might have been big blunders or distractions. I’m curious about some of the temptations that you avoided.

Maybe there’s things that you didn’t do at one moment, but later it was the right thing to do. Maybe it’s international, maybe it’s rapid delivery, maybe it’s new products you would offer to consumers. What were the things that were hotly contested that you decided to hold off on?

Max Mullen

In every company there’s this “should we build our second product?” question, or “should we focus on the first product more?” We, for a long time, thought about international expansion. We thought about other products that we could do. We kept realizing that just focusing on the US and focusing on our core business, which we still weren’t done with, was a better use of resources. We kept the main thing the main thing for a really long time.

I think that was the right decision, but every year there would be different debates about international expansion. Now, 13 years after we started the company, we are an international company. We are doing it and it’s not too late.

Jack Altman

It’s the “right idea at the wrong time is the wrong idea” kind of thing.

Max Mullen

Yeah.

Jack Altman

You also, I’m sure, could have considered acquisitions. I’m sure you looked at that. Did you end up deciding that it’s just too complicated?

Max Mullen

We looked at acquisitions and still do, but we just realized there wasn’t the perfect company to acquire in most of the places we wanted to be.

Jack Altman

Thanks for sharing a bunch of that story. It’s cool for me to hear because I haven’t even gotten to ask you all those questions despite knowing you so well. It’s just an amazing accomplishment.

Before we move on to the next topic, I’m interested in what you’re most excited about for Instacart going forward. Obviously it’s a great business as it is, but what are the things that you’re excited to see?

Max Mullen

The last thing I worked on at Instacart was a bunch of our AI initiatives. The company has really embraced AI, both internally and using it in our products. We’re just now launching some of the first consumer-facing, agentic AI products that I worked on. I’m very excited to see those roll out. I just think that every consumer app in the near future will have incredible features where you’ll be able to push a button and have magical things done for you.

Jack Altman

I want you to integrate with a home robot that cooks, and I just want to tell the robot what I want for dinner.

Max Mullen

I don’t think that’s that far into the future.

Jack Altman

That’s what I want.

Max Mullen

And I think Instacart will be a key part of getting—

Jack Altman

I asked Kyle Vogt this when he was on the show, Bot cofounder. I was like, “Could that happen?” and he’s like, “I think it could happen.” So you guys need to partner.

Max Mullen

I love Kyle and I think we should do it.

Building Consumer Companies

Jack Altman

Obviously you’ve been a great angel investor for a long time. Now you are a full-time investor. I want to hear your opinions on consumer in general. There’s always these memes about “consumer is dead, it’s so hard.” Obviously there are some amazing runaway consumer successes, but they are few and far between compared to B2B. I’m curious to hear from you, as someone who’s done it and has lived it, the building blocks of a good consumer business. Maybe let’s start with the founder. What makes a good consumer founder?

Max Mullen

I think to be a good consumer founder and to build a really big consumer company over the long term, you have to have some view on consumer preferences. You have to see the world through a younger generational lens.

Usually that means an idea that looks contrarian today, that has some sort of stigma associated with it, where most consumers would say, “That’s not for me.” But you see that in the near future that stigma is going to lift. As that Overton window moves, you go from looking contrarian to consensus.

You wouldn’t stay in the spare bedroom of a stranger twenty years ago, and then Airbnb made that a normal thing to do. You wouldn’t get in a stranger’s car, and then you had Uber. Having someone do your grocery shopping for you wasn’t a normal thing prior to 2012, and then we willed that into existence.

You have to have this attitude of, “There’s something I know is going to happen in the near future. We are going to build it so that when people are ready, the product will be there.” You have to be right and you have to time it perfectly.

Jack Altman

So the idea almost has to be a little uncomfortable at first.

Max Mullen

Otherwise you’re in perfect competition. By the way, there are really great large public consumer companies that would love to do the consensus things before startups can. So you have to be a little edgy.

I gave some examples there. Mental health is something that had a stigma that seems to have lifted recently. AI companions are something that today is very edgy, and I think in the future will probably be more normal and many people will use those.

Jack Altman

What else comes to mind for consumer founders besides this?

Max Mullen

So contrarian idea. That means you also have to tolerate looking wrong and looking silly for many years. You have to have a thick skin. You have to really have conviction and tenacity and not pivot.

Then the third thing is you have to run really fast. Once the opportunity becomes obvious, there will be lots of competition. You’ll have to be way ahead, and you have to have a machine that can execute really fast and build the product faster than anyone else. I think there are no great consumer companies where there’s not an extremely high sense of urgency in the DNA of the company.

Jack Altman

Generally speaking, if you had to pick the thing that you’re looking for when you meet founders, how would you name it?

Max Mullen

I’m always looking for people that are what I call irrationally optimistic, that are so excited about their version of the future that they’ll tell everyone about it and attract talent that way. But investing at seed is really tough. You don’t always know. You try to get in person with founders and figure out if they’re the real deal and what their motivations are.

At a certain point, I kind of started looking down. I look at their sneakers. It’s the craziest thing. I’m giving away the alpha here. If you’re looking at a founder and they’ve got dirty white sneakers on—

Jack Altman

Look at my sneakers.

Max Mullen

Perfect. You’ve got dirty white sneakers on. You’re a real builder. You’re in the arena.

The reason why this is an interesting tell is that people who are busy building, they’re locked in on their companies. They’re sleeping at the office. They’re working out of a house in close proximity to their cofounders seven days a week. They don’t have time to buy nice sneakers. They just put on the same pair of sneakers and they get dirty.

I invested in a company that Benchmark is an investor in, Gumloop. One of the founders of Gumloop had such dirty sneakers. They were falling apart. Literally, they’re like flapping.

Jack Altman

You’re like, “I don’t need to hear anything else.”

Max Mullen

First of all, obviously I love the company and both founders, but I had to buy him new shoes. His shoes were so bad. Anyway, I’ve just found that the real builders, they just look the part.

Jack Altman

What’s different here versus a B2B founder, if anything? Some of this stuff exists in B2B, but you’ve also obviously invested in a lot of B2B companies. What’s different? When you’re meeting somebody on a B2B idea, do you think differently about any of those things you just said?

Max Mullen

With B2B founders and B2B companies, you need a little bit more subject matter expertise. You may not be the customer. So you have to have lived the problem or know lots of the customers or have deep insights from having worked in the space.

Starting a consumer company really only requires those three things: You are a consumer, I’m a consumer, and if you have the taste. If you have the judgment and you know where people’s ideas are going in the near future, you can build a consumer company without much domain expertise.

Advice, Investors, and Workshop

Jack Altman

This is a question that’s relevant for you now as a full-time investor. This is a selfish question for me. When you think about the investors that were helpful to you throughout your whole journey through Instacart—the types of investors or the specific actions—what was genuinely valuable to you?

Max Mullen

We obviously have had some amazing investors at Instacart. When you think about what founders get from investors, they get three things in my opinion. Obviously the capital, on some sort of terms that you negotiate. They get the help, and some investors are more helpful than others. And then they get the signal.

Particularly for early rounds, I think founders underappreciate the signal. Having a great foundation of your company and having exceptional investors is going to be something that follows you for the rest of your company. Every subsequent round, the new investors who are going to issue a term sheet are going to call the existing investors. So you want to have a great relationship with your early investors and you want them to be high-signal, awesome investors.

Jack Altman

Why do you think it’s underappreciated?

Max Mullen

Because I think founders often negotiate a lot around the terms and the valuation.

Jack Altman

The focus at the moment of the deal is the equity.

Max Mullen

Rather than that, the focus should really be, “Who is going to help me get from here to the next major milestone? Who is going to help me raise the next round, in terms of having great signal?” Having Jack Altman invest in your company is a way bigger deal at a certain stage than having just a party round of other random investors.

Jack Altman

I assume, implied in the language you’re using, at some point it’s not the most important thing. Once your company has its own big brand, your brand is bigger than your VCs at some point, and so it doesn’t matter anymore.

Max Mullen

I think you get people around the table and on the board that can help you in all the places you need help. And then the incremental next investor is maybe not as valuable in terms of help or signal, and more valuable in terms of capital.

Jack Altman

It’s like you only need one or two of those.

Max Mullen

And you’ve got to be careful not to take advice from too many investors.

Jack Altman

I actually think that’s the flip side. You have too many people like that, you have too many egos around, that can also be a problem.

Max Mullen

I have a framework for founders on how to take advice or not take advice from investors. You’ve got three kinds of decisions in your company: science, art, and religion.

Science decisions have a right answer. Great, get advice from investors on that. Either they’ve solved the problem themselves or they’re on five boards where those companies have solved the problem. Get the advice.

Then you have art. That’s why you’re a great founder. You have taste and judgment. You’re inventing things. You’re engaged in creative destruction. Only you can make the art decisions. Those are the ones that don’t have a right answer, where you’re really blazing a path. You can’t outsource that and you can’t get advice on that. You’ve got to hold that to yourself.

And then there’s religion. This is how you work. What kind of company do you want to be? There are a lot of right answers to that question, but it’s a personal decision. You ask yourself, “What are my values? What are my cofounder or my early team’s values?” And then you make a set of values and you answer that question by looking at your values.

Get advice all day long about science-related things from investors, but on anything else, especially on the taste-type decisions, just ignore them.

Jack Altman

How does all of this make you think about you as an investor and what you want to build and how you’re doing Workshop and all of that?

Max Mullen

I’m trying to be the investor that I wish we had when we were this early, and help people in the first year of their companies. I try to be very careful not to give too much advice, not to give advice on topics where I’m not an expert, and instead to help people network.

Jack Altman

That’s a good instinct, by the way, because a lot of people would be like, “Hey, you founded Instacart. Whatever you say, I’m going to run with.”

Max Mullen

If you’re building an operationally complex marketplace, I have every piece of advice you could possibly want.

Jack Altman

By the way, a note to founders, no matter how good your investors are you should definitely not listen to a hundred percent of whatever anybody thinks.

Max Mullen

A hundred percent. Also don’t take a bunch of people’s opinions and average them. That’s also a bad way to go.

Jack Altman

That’s a horrible way to go.

Max Mullen

A lot of founders do that.

Jack Altman

They do. Why are you building Workshop in this sort of coworking type of way? Why do you have a space for that?

Max Mullen

I’ve got a founder space. I like to work alongside founders, in person. I just think San Francisco is the best place in the world to build a technology startup.

Jack Altman

It’s crazy how it recentered. During COVID we almost lost it.

Max Mullen

I don’t really think it was ever gone. I mean, I stayed.

Jack Altman

You know I’m a big suburbs guy.

Max Mullen

And I’m a big city guy. I think the city’s great and the founders stayed and new founders have come. It’s really the best place to build.

Jack Altman

A funny thing I was realizing… We’ve got this friend group and people have been on the show. There was a point earlier on where both you and I were founders and had a bunch of VC friends. And then a couple years ago I became a VC. Now look at you. It’s just a crazy life cycle, isn’t it?

Max Mullen

It gets everyone.

Jack Altman

Are you excited for it?

Max Mullen

I love helping founders and this is just the best platform on which I can help founders. So that’s why I’m excited.

Jack Altman

This was really nice to have a serious conversation with you for once. I really enjoyed it.

Max Mullen

For once. Maybe we should do more of this.

Jack Altman

We should do more of this. This has been special. I haven’t seen you do a lot of podcasts, but maybe this will be part of your new media strategy. Are we going to get some more Max in the media? What do you think about it all?

Max Mullen

I’m excited to build a little bit more of my brand and tell a little bit more of my story. Garry Tan is very good at this.

Jack Altman

He was your partner?

Max Mullen

Garry Tan was our YC partner. I think he’s obviously executing this very differentiated media strategy.

Jack Altman

He had a YouTube channel before he took over at YC too. That was really good.

Max Mullen

Yeah, for Initialized

Jack Altman

All right, Max. Thank you for doing this.

Max Mullen

Thanks, Jack.

Brad Lightcap serves as OpenAI's COO, overseeing its business, operations, and strategic partnerships across Research, Applied AI, and go-to-market. He also manages the OpenAI Startup Fund. Previously, Brad was part of Y Combinator Continuity and led finance and operations initiatives at Dropbox.

We discussed the shift from chat-based AI to agents that can take action, and what that means for software and the broader economy. We also covered how these systems are being built and deployed, how tools like Codex are changing how work gets done, and what this next phase of AI unlocks for startups and incumbents alike.

Timestamps:
(0:00) Intro
(0:39) The early days of OpenAI
(3:47) A research centric culture
(7:32) Post-ChatGPT chapters
(11:54) Sci-Fi future or good software
(15:26) AI’s impact on rural communities
(18:57) Codex and coding of the future
(24:04) Doing a lot of things at once
(27:55) What VCs should invest in
(35:43) The software sell off
(38:23) Using Codex over ChatGPT
(42:32) FDEs and Private Equity
(44:53) Working with Sam

Links:
https://x.com/bradlightcap
https://x.com/jaltma

Watch on YouTube; Listen on Apple Podcasts or Spotify

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Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

Joining OpenAI

Jack Altman

Brad, thanks for doing this with us. I’m excited.

Brad Lightcap

Me too.

Jack Altman

Do you have enough drinks? Would you like one more?

Brad Lightcap

I’ll take whatever I can get.

Jack Altman

I really appreciate you making time for this. I’ve been really looking forward to it. Here’s what I wanted to start with actually. I was thinking about this last night. You joined OpenAI in 2018. It was a research lab. You guys are beating Dota and then four years in, ChatGPT launches. It’s this whirlwind that’s been, I guess three years, but I’m sure it feels like a lot more.

I was curious if you could share your narrative or recollection of what the journey’s been like. What are the chapters? What’s your experience been like as you look back on this so far?

Brad Lightcap

Chapters is the right word. The journey of OpenAI—which I think tracks the journey of AI as a field, as an industry—has been broken up into these weird periods. When I joined, no one had really heard of OpenAI. Our work was relegated mostly to small niches of San Francisco tech culture that followed such things as us beating the best Dota players in the world. Really, I didn’t have anyone to talk to about it. Everyone was like, “What are you doing there? What do you do there?”

Jack Altman

You were the CFO when you joined, right?

Brad Lightcap

I was our CFO.

Jack Altman

What were you thinking when you joined? What did you expect it was going to be?

Brad Lightcap

I didn’t know. I was 27, and maybe I should back up a minute. I was at Y Combinator prior, working with Sam. I was starting to spend a lot more time with what I call our hard-tech portfolio in YC. All the companies that are building everything that wasn’t pure SaaS and internet, consumer internet. So I was spending a lot of time with everything from nuclear fusion to satellites to biotech, anything that would fit outside. OpenAI was kind of in that camp. AI was one of those things that was promised as this future technology, but I wasn’t really sure who’s actually building this.

OpenAI started as a YC research project and so it was in the family. Sam had called me and was like, “Hey, I need someone to help basically do everything that isn’t just the research at this company. Do you know anyone that would be good?” I tried to help them find someone, couldn’t find anyone, and so I was like, I’ll just help you myself on the side.

But I started spending a lot of time with Greg and Ilya and the team that was there at the time. I realized that they had these crazy properties that apply to AI, which now we understand to be basically the scaling laws. Consistently the field was starting to discover that when you make things bigger, the results just get predictably, consistently better.

At that point, this is just a compute problem, and intelligence basically can just be bootstrapped from scaling up very basic general architectures that can turn into a more general intelligence. I was like, I don’t know if this is true, and I don’t know if this will hold. I’m certainly not qualified to judge that. But if it does, and these guys seem convinced that it is true, it’s going to be the most important thing ever. At 27, that just seemed more interesting than investing in tech.

From Research Lab to ChatGPT

Jack Altman

So you started doing that and then what happened in those early years? People are building things that are working, beating the game and a lot of other projects. What were you seeing on the inside from 2018 to 2022?

Brad Lightcap

I would say it was much, much more of a research-centric culture. OpenAI is still highly research-centric. I feel like people think post-ChatGPT it became much more this product-centric culture. But research really drives everything. I think that started because of how much that was cemented in that period as the cultural foundation of the company.

I spent a lot of my time really just trying to figure out what researchers needed to be successful. That spanned from the capital that we need to invest in supercomputers to working with partners to do the supercomputer design and build out, to things as trivial and pedestrian as, “our robots keep breaking” and “it takes too long to drop ship parts from this one supplier that sits in some small town in England. How do we tighten that loop and go faster?”

So it was this very diverse set of problems early on that were really just about pure research acceleration. Obviously now it’s both research and deployment and our business. But early on it gave me an appreciation. I just spent all my time with researchers and so it gave me a firsthand understanding of what was happening before I think anyone else really appreciated it.

Jack Altman

So then there was ChatGPT at the end of 2022. Did you guys on the inside feel like, “Oh, this is going to be something?” When you were playing with it before it got released, was the vibe inside that this is another cool thing, it’s a playground? Or were people like, this is something?

Brad Lightcap

There’s a word that sometimes people use in AI to describe when there’s an indication of something that’s happening, but it’s not quite happened yet, but you get these little sparks. That was how I would describe the pre-ChatGPT period: there were a lot of sparks. You could see that the models were now starting to get good enough that they could emulate humans in a conversational format. You could see that there was an interest that people had in directly prompting the model.

People forget that this was not the way that we originally engaged with language models. We thought of language models as completions engines. You start a text string and then it basically takes that as an input and continues the text string on. This more conversational, dialogue-based format is not the original invention of language models.

But what we were seeing is we had an API that was a completions API, and we had an interface that basically let people put text into an interface that would then show a preview of what the model would actually produce as an output. But people were trying to use that interface in a more dialogue, conversational turn-based format. You could see it. If you paid attention, you listened, you could see that people wanted to talk to the model. That was the natural, intuitive way that people wanted to engage with it, but it wasn’t actually quite built that way.

The other thing that we saw ahead of time was that we had trained an early version of DALL-E. It was our first image model. It wasn’t very good, but it was really a breakthrough at the time. For the first time you could now generate images. We had seen some adoption of that model in a more consumer prompt-based format.

So we had guesses leading up to ChatGPT that it was going to be something important, but we didn’t appreciate the scale. My guess at the time—we all took guesses because we had to do the compute planning—was at peak there’d be a million concurrent users, and obviously we were very wrong.

Jack Altman

So what are the chapters since, if you look back the last three years? What are the phases? If you were describing to a friend, here’s the phases of my journey post-ChatGPT, how would you bucket it?

Brad Lightcap

There’s phases of the company’s life, and then there’s phases of the industry and the technology. On the technology side, I would say obviously there is this proto period of research just starting to work. I call that the scaling period, where we just realized that you actually could go from something that was unusable to something that was usable across most model formats. That was before mass consumer adoption. That was 2018 to 2022.

I think 2022 to 2024 was really the period of chatbots, where all of a sudden it was generative AI. It was people realizing that you actually could have something that was useful, but it was not totally clear exactly what it was useful for. It was new and novel. The utility was still not totally there. It was a slightly better version of search.

Then the next chapter, and I think the one that we’re in now, is this period of agents, which is AIs that actually can go do things for you. They run asynchronously. You can give them instructions and they can take an arbitrary amount of time and tokens to go off and think and figure it out. They can use tools. I think we’re in the middle of that period. I think that started for me in December of 2024 with the release of o1 and then through 2025 and into 2026.

Jack Altman

You think we’re in the middle of that now?

Brad Lightcap

Yeah, I think so. I think weirdly, in each of these things—because the utility quotient on the models goes up by some enormous factor—I actually think there’s almost more time it takes in each of these eras to explore the full potential of the model. I’ve always said to our customers and partners all the time, you could stop progress right now and I still think there’s a 10 or 20 year diffusion and innovation cycle that just comes—

Jack Altman

Just to get it into the economy.

Brad Lightcap

Just to get it into the economy and for people to realize what these things are capable of. With chatbots that maybe would have been five years. With agents it’s probably some multiple. Obviously the technology will progress much faster than that. So that dissonance of the diffusion period being much longer than the actual innovation cycle is going to be something interesting to watch.

The Age of Agents

Jack Altman

How far away are we from the completion of what agents can do? Is it the beginning of a thing that will never end? Are we halfway up an S-curve? What is the current sentiment for what the endpoint of agents’ capabilities will be?

Brad Lightcap

I personally feel totally unmoored here. I don’t know. The historian and technological economist in me wants to think that everything has to fit into these very nice S-curve-shaped paradigms and the innovation cycle will look exactly as it always has.

Jack Altman

Even if there isn’t a script, that we could be right here.

Brad Lightcap

Yeah. The Carlota Perez thing, like this will all be the way that it has been. But there’s a lot of meta levels to this. We don’t quite understand that when you’ve got systems that now have in some sense their own agency, there’s almost infinite levels of things that can happen. They can now start directing other agents.

Jack Altman

They can work together.

Brad Lightcap

You have the temporal aspect. They can think and work for longer, as long as they can cohere the context basically through that period, which is something that I think will get solved. Even basic primitives like memory and other things that are core to very long-horizon work and work that you would do over multiple sessions… All of those things haven’t even yet been sorted out, but are starting to get figured out.

Jack Altman

I’ve always thought, in the last year, why are we not going to get to a place where you can just prompt, “Build me a business, make no mistakes.”

Brad Lightcap

Exactly. Yes.

Jack Altman

I don’t see why you couldn’t be like, “Hey, can you go make me a million dollars please?”

Brad Lightcap

You play it out in the limit and you’re like, I don’t know, maybe that’s possible. If you go back and say, even if you pause progress right now, maybe it’s longer. Maybe it’s 40 years or something, or 50 years of progress that will come from this, just on the basis of this step of the cycle.

The Sci-Fi Paradox

Jack Altman

One of the interesting things that I’ve experienced is right after ChatGPT, I think a lot of the conversation around AI was living in sci-fi land. Are we going to have the next species take over? Are there Dyson spheres? It was very big.

Then what I’ve experienced over the last few years is that it’s been extremely commercial in a good way, but in a very down-to-earth way. It’s in the economy, operated by humans, it doesn’t feel scary. It just feels like insanely sick software. But there’s still this lingering thing in the background that I think gets talked about a little bit less.

Is there sentience? Does it go to this other place? Is that still a conversation that matters? Is it something that’s still thought about, or is it just, “Hey, we actually feel now this is just really good software, there’s nothing to be worried about, it’s just an insane technical revolution”?

Brad Lightcap

This is a really interesting question. I think in some sense the better the technology gets and the more it pushes toward that sci-fi future, the more we actually end up having the conversation about it almost diminishing to it just being a tool. It’s a weird paradox.

I’ve noticed the same thing because I used to sit at the OpenAI that was very much having the conversation about Dyson spheres, because in 2018 that was all you could talk about. You basically had something that was barely working at the beginning, and then you could try and see—

Jack Altman

You think about the whole thing. Once you’re in the middle of it, you think about the steps right in front of you.

Brad Lightcap

Yeah. There’s a local linearity that starts to set in where you’re a little bit like, okay, I appreciate that this thing is a gazillion times better than what it was in 2018, and the capabilities are multitudes more than what they were even two years ago.

Jack Altman

As an example, you talked about DALL-E. When that came out, I was like, oh, that’s cute. But now, just a few years later, I can’t tell if a video’s fake or real half the time. That’s going to get all the way there where you’ll have no idea.

Brad Lightcap

And I think in some sense there will be these parallel conversations that happen. There will be the enterprise productivity conversation because that is something that people are actually thinking about, want to talk about. Everyone’s going to glom on to what the narrative is there. It’s just—

Jack Altman

Are we waking up a new God or are we helping lawyers be more productive?

Brad Lightcap

I think we’re doing both. I think the parallel track of this insane level of empowerment of an individual person to do things that would have been inconceivable even a couple years ago… You’re already seeing examples of it. That to me is the weird sci-fi future.

There was the story over the weekend of a guy in Australia who is curing his dog’s cancer, who has no background, as I understand it, in biology. He basically just had GPT-5 effectively try and come up with some sort of RNA-based vaccine that could treat his dog. And then he worked with a lab to do the design of the treatment and they sent it back and it seems to be working. It happened for $3,000 and in a matter of a few weeks. It’s a crazy thing. That to me would qualify as a spark of a sci-fi outcome.

Jack Altman

It’s just crazy how fast we adjust to anything. We could learn that there’s aliens tomorrow and next week we’d be like, “Yeah, of course.” One of my takeaways with this whole thing is people just adjust to any new surrounding. You just think it’s normal in no time.

Brad Lightcap

A hundred percent. That’s been my experience. Things are novel for about three seconds. The next day it’s, “Okay, what have you done for me lately?”

The Optimist’s Case for AI

Jack Altman

On this topic of “what is the thing”, I’m watching it all and I’m from St. Louis. Now I’m living in Silicon Valley. There’s a very different perception of AI in the St. Louises of the world versus Silicon Valley. I think here the general sentiment is, this is amazing, thank goodness this happened. Around the country, maybe the world, there’s real skepticism and anxiety and fear.

People here have that too, but it’s this interesting reckoning where you’re grappling with, simultaneously, “Oh my God, that’s amazing, that’s awesome,” versus “Oh my God, that’s amazing, that’s a threat.” How do you think about the right way to interpret this? What are the genuine concerns and fears that we’re going to need to work through, and what are the things that you think are misunderstandings that will actually just be really positive?

Brad Lightcap

No one knows the future exactly. So I think everything here is speculation on all sides. I come at this from more of an economics, history-of-markets background, which was more where I spent my time in college. I’m still trying to understand the world through that lens. First of all, I think it is really a bummer that the world’s view of AI is what it is. I blame no one other than the industry for that. I think we as an industry have done a horrible job of being able to paint for people a picture of a future that is way better than the world we live in today.

The crazy thing is I actually think that is the reality. The stories of the guy who is curing his dog’s cancer are going to become much more commonplace. I tend to find a lot of comfort in the idea of individual empowerment. Anyone anywhere on Earth can have an idea, and the time to value from conception of idea to thing that exists in the world starts to collapse to zero, not only from a time-to-value perspective, but also a cost-of-creation perspective. I think amazing things are going to happen when you reduce that friction and you increase that access. People are incredibly innovative, they’re incredibly creative. Everyone is motivated by their own set of circumstances and the problems that are in front of them to want to improve the world they live in.

I think 99% of it is a tools problem. They historically had no means to be able to do that. When you give people something that now enables them to start a business, do research, create a new thing, build a new service, serve customers more efficiently or cheaply, only good things can happen in my mind. Now obviously there are things that come with that. We have to be thoughtful about what the technology presents in terms of the flip side, because it’s as capable of doing harm in some cases as it is of doing good.

But I tend to think that we will figure that out. We are resilient and equally creative as a species. Whenever we’ve been confronted with the opportunity to create something that has potential for greatness, we also have been really thoughtful about how we build institutions that protect against the downsides.

So I have a more optimistic view. I think the industry has more of a duty to help people appreciate and understand what’s happening, and to help people live the experience of it, to use these tools to do the types of things we’re talking about.

Coding and AI

Jack Altman

An interesting instance of this conundrum is in coding. This is something that’s easy for us to talk about because we’re very familiar with it, and it’s one of the best applications of AI so far. AI is really good at coding. So then you could bump that up into the real world and say, are we going to have more developers? Are there going to be more people doing more things? Is it going to replace people? I think the data I’ve seen so far is actually that there’s more engineering jobs being posted every month than ever before.

But I’m curious how you think about this, with coding as an example of what’s going to happen when it bumps up into the real world of people doing stuff.

Brad Lightcap

This is where I try to come back as rationally as I can to this economics-based, market-space view of how things have worked in the past. You have distortions in supply, demand, and costs that create these weird inflection points in human productivity. If you reduce the cost of software engineering, for example, to virtually zero on the margin, the simple thing to think would be, okay, software engineers won’t exist anymore.

The thing we’re seeing in reality with tools like Codex and other things is, actually, when you reduce the cost of something to zero, the demand for it goes up significantly. The job of the people who were previously described as software engineers, who were hand-typing every character of code—

Jack Altman

They’re now guiding agents.

Brad Lightcap

They’re now just doing a slightly different version of the job.

Jack Altman

I think some of this is that the cost is lower, but it’s not zero. Which is a good thing, I think, because between two companies that are competing for a new market—let’s say they’re doing AI for construction—if you have two companies, even if engineering got much cheaper, if one still decides to spend ten times more than the other, presumably those people are not going to do nothing to improve the product. So I think we’re just going to get better software rather than fewer people working on it.

Brad Lightcap

Software is wildly underpenetrated in the world. I think if you actually zoomed out and said, of all the places where software—and good software, not just software—

Jack Altman

By the way, there’s still so much bad software everywhere. If you go to a hotel and you look behind their screen, you’re like, “What are you typing on?” There’s a lot of work to do.

The Codex Breakthrough

Brad Lightcap

It’s crazy. And that to me is also, by the way—you want to talk about risks—that’s actually where I think the risk surface exists. It’s the software systems that hospitals use, that power grids use, that store customer information through a hotel. These are all fairly archaic systems for institutions that actually span meaningful percents of the world’s GDP.

I would look at this as, in some sense, almost the greatest thing to ever happen. You’ve now got systems that can help update all of that software, that can bring software into places where there’s zero percent penetration, that can help reinforce and harden systems that are exploitable or vulnerable. In terms of how much we actually needed software relative to how much we’d penetrated, I think if you could actually measure that, we’d be at 1% today.

So I have a maybe slightly different view of this, a personal view of course. If you have AI that can write really good and obviously safe software, I think that is going to be one of the greatest gifts to the world. The speculation around whether there will be software engineers in the future or not is the wrong question. There are going to have to be people who oversee the design, implementation, and maintenance of what could be 10,000x the amount of software and code that gets written in the world. That is going to create a unique demand cycle that may not look exactly like what we do today in software engineering, but it’s going to be important.

Jack Altman

Absolutely. What was the breakthrough that happened for you all recently with Codex? It seems like some step-function thing changed in the last few months in the industry, and for Codex in particular.

Brad Lightcap

It’s a few things. One is the focus of the team at OpenAI building Codex. I’ve been at OpenAI a while, as you said, and the work that team is doing to drive that product with the amount of focus and intensity that they’re doing it with is a singular and unique effort in the history of the company. They are obsessive about the quality of the product, obsessive about the quality of the model. Because of where we are in terms of how models are trained, the cycle time on how fast we can drive improvement is starting to collapse. That’s why you’re seeing these jumps from GPT-5.1 to GPT-5.2 to GPT-5.3 to GPT-5.4.

Now it’s not surprising that you get a model like GPT-5.4 that, as of today—here we are in mid-March—the model’s a few days old and is doing a billion-dollar run-rate revenue, doing 5 trillion tokens a day. It is now far and away our most dominant model of our set of API models, and is also driving Codex growth at the rate it’s going. I think that’s only going to increase this year. By the end of the year, I think we’ll look at the models that power Codex and our APIs today and think they’re pedestrian.

Jack Altman

Obviously OpenAI started in chat and then moved into all these different things. Over time I think it has become probably one of the most unique companies. Included in that uniqueness is that you guys have done a lot of things. How are you thinking about that now? The market is starting to somewhat mature. You’ve had new companies come out, spin out of OpenAI, and focus on areas that have turned out to be really productive. I’m sure that’s changing the way you guys are thinking.

So I’m just curious, the state of the union in early 2026. When you look at where you are, what’s around you, what matters now, what do you care about? What do you say got you here, and what’s going to get you there? What’s the focus?

Brad Lightcap

One of the cool things about OpenAI is it has a very wide aperture on how it looks at what its ultimate mission is. The lines that people drew in the world prior—you’re B2B or you’re B2C, or you’re hard tech or you’re software—all of the things that the VC ecosystem segments themselves by—

Jack Altman

“Got to have a lane.”

Brad Lightcap

Yes. We don’t see those walls. We see AI as this enabling technology that is going to drive innovation cycles across all of the above. It could be in the enterprise, it could be in consumer, it could be in creativity, it could be in robotics, it could be in hardware.

What we want to understand is, what do each of those bets look like? OpenAI has an operating model that has been tried and true for us really since the company started. It’s able to be experimental, able to try and iterate, able to be very model-forward in how we think about a problem, and not really feeling like we have the incumbency of the last generation. And then we try to see if we can build the thing that we think is possible. If it works, you build an effort around it. If it doesn’t work, you shut it down and you recycle those people back into a new thing.

That was really the way that OpenAI operated early on. It still somewhat is, this expansion-contraction model in research where you’ve got maybe 20 projects that are all trying different things going on at the same time. Maybe two or three of them will really work. You scale those up, you consolidate people back into those projects, and then over time, as you shift into a next paradigm. You spread back out again and take more bets.

I think that’s going to be how this goes. Everything is, in my mind, downstream of research. If that’s the cycle of how research is working, the product and deployment cycle should look similarly.

Jack Altman

I also feel like I can tell from the way the product’s feeling, it’s a unified model. It’s going to all just be a unified thing at some point here soon. It’s already going that direction. That thing will just be used by people whether they’re at home or work. People use Google at home and at work, and it just becomes the tool.

Brad Lightcap

We need the models to start doing more work for users is what I would say. If there’s been one really big gap in the consumer experience in AI so far, it’s been that users have to do too much work. You’re promised this future of these really smart models that can solve all your problems very dynamically. Yet here we are with 18 things in a model picker. Do you want thinking fast mode, do you want pro thinking hard mode?

Jack Altman

It’s crazy. It’s time to move on.

Brad Lightcap

It’s time to move on. That to me feels like the direction you’re describing, this more consolidated experience. I just don’t want to think about it. I just want intelligence, and I’m going to let the model decide how to allocate that on a token level most efficiently.

Where Startups Should Build

Jack Altman

Okay. I want to move the conversation to a selfish place now. You’ve been an investor before. My question is, what should I invest in? Maybe to put a little framing around it, there’s a frequent worry among founders of OpenAI releasing something and getting their face blown off. What’s safe from AI? What will or won’t the models do? Where can a startup predictably add value?

Sam talked about how you should build your company such that you’re planning for the models to get smarter. If the models getting smarter is good for you, that’s a good thing. If the models getting smarter is bad for you, that’s going to be really tough. Can you unpack it a little bit more now, just as months and years have gone on, what are the safe places for a startup to try to do work that they can expect to still be available to them in three years? Or should they just all join OpenAI?

Brad Lightcap

I don’t think they should all join OpenAI. First of all, the level of energy in the ecosystem right now is nothing I’ve ever seen. The quality of founders and the—

Jack Altman

And the effort.

Brad Lightcap

The effort. There’s this intensity and this urgency.

Jack Altman

Do you remember the startup ecosystem right before ChatGPT? After ZIRP, we had come down from the SaaS glory moment. That was tough. I don’t know where we’d be right now without it. It would be not fun.

Brad Lightcap

I was at YC in 2016 to mid-2018.

Jack Altman

That was good.

Brad Lightcap

The front end of that was a fun time to invest in growth. We were fortunate enough to invest in the growth rounds of a lot of the companies that had been built in the last five years prior to that. Then weirdly, it just got less fun, I think in 2017, 2018, I don’t know what it was, it just felt like the ecosystem was tired. It didn’t feel like there were a lot of new ideas.

Jack Altman

I think a lot of the obvious stuff had happened at that point. I think without a new technology shift… There’s always more to do, but at some point the first 80 of the 80/20 gets done. Now you’re rooting around in the 20.

Brad Lightcap

I think that’s right. But it feels firmly now there’s this entirely new cycle, and the urgency and the excitement is very much there. Also just the ambition of the companies that we engage with, it’s stunning to me sometimes. I’m like, you’re going to do what?

Then you realize there’s an enablement factor. As soon as you get models, for example, that are good enough at software engineering that they can start to design and write in new programming languages, or that they can speed the time from being able to take old code bases, refactor them, and then rewrite them into new and modern frameworks that enable another company to exist and serve an area that was historically underserved… You realize that there’s an entire industry here that didn’t exist that’s about to get built. Then you’ve got a founder who sees that and they’re like, I’m going to go after that.

That’s partly the answer to the first question. If you think of model capability as dropping successively larger rocks in the pond, the ripples from those rocks reverberate wider and further and it creates more and more surface area around the circumference. I think the way I would look at it is you don’t want to be right under the rock dropping. You’re going to drown. That’s a very hard place to be. But you want to really be right out on that outer edge, on that surface of what is the thing now that is enabled by this advancement in capability that wasn’t previously workable before, in a very specific and opinionated area on a very hard problem that has historically been underserved.

Jack Altman

I guess to stick with your metaphor, I feel like some of the fear is that the next rock you drop is going to be bigger than the circumference of the ripple of the last rock. So things that were at the edge before are now squarely in the center of the model.

Brad Lightcap

I think there’s no substitute though for being familiar with a user, a problem, how the existing industry serves that problem or doesn’t serve that problem, and just being very close. YC always had this thing, basically just talk to users. It’s simple advice. Sounds trivial, but not enough people do it. When you actually get into it you realize the world is gigantic. 99% of people get to use bad tools or don’t have any tools at all.

The quality of experience of the people that exist as their customers and users is not very good. Everyone’s lived that in some capacity. Everyone has lived the bad experience of going through modern life and dealing with the things that we have to deal with. I just think if you’re sitting there lamenting the idea that there’s no more good ideas and no more new ideas, it’s just lazy.

Jack Altman

I feel like there’s at least two other things that can give you comfort as a founder. One is that I don’t think any company, no matter how great it is, can do everything. There might be 10,000 people working at the labs, but there’s millions of people in other places and you just can’t do everything.

The other thing that has surprised me is that some of these markets are just so ridiculously big. There are eight things that are all doing well around, let’s say, code gen and website building and internal tool creation and whatever. You could do that probably straight out of Codex, but you can also use other products that are great, that are based on Codex and things like that. So I think some of it is just that these markets are hard to appreciate, how big they are.

Brad Lightcap

Again, there’s no substitute for being able to talk to users and being able to identify what people really want. At OpenAI, our focus is really on trying to improve the models and do the best research we can possibly do. But for someone in a very specific area of the world who has a very specific set of needs, who wants to do one thing and they want to do it really well, there’s probably some alpha there.

The New Way to Build a Company

Jack Altman

I do think it changes the way you need to build a company versus in the past though.

Brad Lightcap

I agree.

Jack Altman

What I’ve noticed is a lot of the great founders today seem very willing to just rip everything out that they’ve done up till this point and keep only their team knowledge, customer relationships. But if the product we built so far is wrong, we’re going to just trash it in a way that I think people were much more precious about before.

Some of this goes to there’s a new ephemerality to a lot of these things. When software is super easy to build, I can make a UI that works for me today, but I’ll throw it away because I can just make a new one tomorrow. I think that’s an interesting trend too.

Brad Lightcap

I have seen, a handful of times now, founders of companies that were built in that period between, call it 2008 and 2016 or something like that—who are the canonical darlings of software from the last decade or so—who have founders who are still running the company, who have basically decided, I’m effectively restarting the company.

They have taken it on themselves to fork off of the mainline effort to basically go figure out what the second chapter of this company looks like in a world where the primitives and the tools and the assumptions have changed.

Jack Altman

Which is a hard thing to do. There’s just so much sunk cost to it all.

Brad Lightcap

Yes.

Jack Altman

But I think the people who are able to adapt to that, it’s a huge advantage it seems like.

Brad Lightcap

Totally. You can iterate so fast now. You can explore the action space so quickly. And you have the benefit of legacy customer relationships. You’ve got the benefit of existing teams. So in some sense you almost are starting with a head start. The way I see it is you can learn faster. Whereas if I were to start a new company tomorrow, I’m starting with no customers and no funding, no product and no team.

Jack Altman

I guess related to this, how do you feel about the selloff in public markets? Obviously outside of the big companies which have done great, public software companies have taken a pretty bad beating. When you think about the work that you’ve been doing with them and what you’ve been seeing, are you watching that and you’re like, this makes sense, or are you like, actually this is a misunderstanding and you’re feeling bullish about those companies?

Brad Lightcap

Hard to comment specifically on the market. The market is a very frenetic thing. Here’s what I live day to day. We work with basically every company that sits in the Nasdaq that you could imagine. A, all of these companies are as motivated and moving as quickly as any startup. B, they’ve got amazing customer relationships. They’ve got amazing depth of understanding of the problems they’re trying to solve, the areas that they serve. Obviously they’ve got years and years of perspective that have been built. I think now in some sense they’re able to leverage and benefit from the same tools that anyone else is.

So the conversations we’re having with them are really about them starting to rethink, end to end, their entire customer experience, their product, starting to think about how they serve adjacent markets, starting to think about ways that they can pass capability through to their users. Creating entirely new experiences that weren’t possible before. So I think you could take the other side actually. I think you could take a very long view here.

Jack Altman

In some ways the software itself is the easiest thing at this point. Having all the relationships, the team, the trust with all the customers… That’s actually the hardest pole of the tent to have now.

Brad Lightcap

If that class, if that segment was asleep, I would say okay, maybe that concern is more warranted. But—

Jack Altman

But they’re not.

Brad Lightcap

No. And it’s happening at the CEO level and the founder level in some cases where everyone is as motivated to figure this out and figure out how to create value for their customers and their business as anyone else. So I think it’s the beginning of a new cycle, that’s my guess.

You’re always going to get new companies that form that are trying to take a fresh and new approach. Often the benefit that those new companies have is that the incumbents don’t realize what’s going on and are too slow to move. Here, you actually don’t have that dynamic. You’ve got everyone running, trying to run at the same speed. So I think that’s exciting. I would say if you’re long AI and long startups, then it might even make sense—maybe as a contrarian opinion—to be long legacy software too.

Codex as a Daily Driver

Jack Altman

I don’t know if you’re experiencing it one way or another. It doesn’t have to be founders, but even people joining OpenAI from some older company that had not been AI-native. How do you help people reset? What does it take for people who have lived in the pre-AI era to work the new way?

Brad Lightcap

I think you have to see it firsthand. If you’re not playing with Codex every day, I think it’s hard to intuitively grok just how disruptive and crazy it is. Codex for me has replaced ChatGPT on a daily-driver basis, and I’m not even technical. I don’t write software for a living, but it has a general capability. I’m specific enough about the set of things that I want, and I’ve developed enough familiarity with it.

Jack Altman

What are you doing with it? What’s a daily quick use case?

Brad Lightcap

My life is basically a daily struggle of things that I would like to see get done.

Jack Altman

I thought you were going to just end it with “my life is a daily struggle.”

Brad Lightcap

Well, that too. But things that I would like to see get done, and then how fast our team can mobilize and operationalize to get it done. At a busy, fast-growing company, sometimes those timelines drag. When those timelines drag then the thing that I want to see us do starts to drag. Everything elongates into this thing where if everyone were a hundred percent focused on this thing it would take two days, now it takes basically a month.

One of the things I’ve started using it for is supplementing that. It gives me a first version of everything. For example, we’re building a fairly substantial forward-deployed engineering org, which we can talk about, but recruiting for that has been challenging. Recruiting’s hard.

Jack Altman

You’re using it to recruit?

Brad Lightcap

I’m using it to basically go figure out lists of people that we’re thinking about recruiting, how do you navigate and stack rank among that list before you start getting into the candidate engagement? It’s crazy because everyone today has this online presence and a lot of people have blogs and X accounts and all that.

I just told Codex, “Take this list and basically go figure out what public presence any of these people have. Come back to me and effectively read their online content and score it against how you think about some of the technical elements of our work and the job descriptions of the things that we’re doing.” It works even for a non-technical task like that. It basically writes a program and will figure out how to efficiently look at each of these profiles and come back and give me scores on how good it thinks each of these candidates’ online writing has been.

It’s cool because it actually surfaced for me three or four candidates who I couldn’t have picked off the list staring at a list of 200 names, but where I was like, “Okay, let me go double-click on this.” Now it gives me an opportunity to really look into that candidate’s profile and their blog and whatever and start to just get to know them better. That process would’ve taken a busy recruiter probably a couple weeks. It’s a lot of names. Here it just collapses down to 20 minutes.

Jack Altman

By the way, I bet a lot of this is what is going to be needed for people to just broadly be excited about AI, not frustrated about it. Using it and realizing that it’s super empowering. Versus thinking, “Oh, all these other people are using it to be empowered.” No, just start using it. I guess a lot of that is you getting the tools to a place where it can be adopted super easily by everybody.

Brad Lightcap

For sure. One of the things that I feel is the story that hasn’t really diffused into more mainstream conversation is just how general these tools are. You don’t have to be a software engineer to use Codex.

Jack Altman

It’s fascinating that you prefer Codex over chat for a lot of your work. It’s cool.

Brad Lightcap

The Codex app is amazing. If you haven’t used it, check it out. The terminal-based use is maybe a little more intimidating if you’re not technical, but in an app interface it just looks like chat, and I think it’s got much more general agent capabilities.

Forward-Deployed Engineering

Jack Altman

On the topic of the forward-deployed stuff and private equity, what’s the thinking there?

Brad Lightcap

The thinking is very much what I was talking about earlier. If you think about the way that software is going to get built in the future, in some sense now any specific problem within any company, in any part of their process, historically it would not have made sense economically to have spent a lot of time thinking about how to solve that one corner of a problem. It’s too expensive to hire a bunch of people, to build a bunch of software, and for that software to then have to be maintained. Obviously for the most important problems in most large enterprises, you could hire people to do that type of thing, and there’s entire industries that have gotten built around that.

But for 99% of problems, for 99% of businesses, that’s totally out of reach. You’d have to either decide that you wanted to hire a couple people to try and build something on their own that maybe didn’t work super well, or you look to see if the market offers a solution. But the problem is that the solution doesn’t necessarily fit exactly what the shape of your problem is.

So now you’ve got people contorting themselves trying to figure out how to adopt the thing off the shelf that wasn’t really built for their company. It was just built as a general-purpose tool. I think that entire era is over. Now you actually can reason about how almost every problem inside of a business can have solutions that are custom-built for it. It goes back to this weird paradox of what do you think is going to happen with jobs.

We wouldn’t be wanting to hire FDEs as aggressively as we would if it felt like software engineering jobs were going away. The jobs of those FDEs are different. If you’d hired an FDE five years ago, they’d be doing something different than what they’re going to do in the future.

But the amount of demand and the amount of opportunity that we see, to be able to go address surgically every area in a business that could benefit from solution design—and not solution design that happens on the order of 18 months, as is the industry norm, but solution design that happens on the order of maybe 18 days, if not faster—that to me is an incredibly large opportunity that I think will be the story somewhat of how the next few years go. The FDEs we’re hiring are really to help address that.

Working with Sam

Jack Altman

Last question I have. Just your reflections working with Sam. It’s funny, I obviously know him as a brother. You know him as someone you’ve worked with for a long time now. I’m curious what the evolution you’ve seen has been like, now that he’s obviously gotten to a different place in the public sphere. There’s this whole public persona, and then you obviously work with him on a daily basis. What’s the whole experience like for you with him?

Brad Lightcap

We’ve worked together for 10 years. 10 years in January.

Jack Altman

And the first year or two was YC.

Brad Lightcap

First two and a half years was YC and then I got to OpenAI before he did. I would say I recruited him to OpenAI.

He’s a remarkable individual. I wish more people could spend more time with him off the record. I think he’s not innately someone that enjoys being a public face of things. I think it certainly feels like an unnatural thing for him. He’s someone who much prefers spending his time sitting in a huddle of five people talking about the future and having a deeply technical conversation about some niche topic. That’s who he is internally at OpenAI. It’s what I’ve always known him to be. I think if more people could spend more time with him, you’d realize he’s an infinite optimist.

Jack Altman

That’s crazy. Because the way I experience it, it’s almost like this sacrifice to have put himself out so publicly, which is a requirement to make all of this happen and show the world that by accumulating talent, compute, and all these ideas in one place—that’s what made all of this possible—then everybody can see it. But that’s such an uncomfortable thing to have done.

Brad Lightcap

It’s interesting because he thinks on a timescale that’s more like a decade-plus, and I think the world struggles to think beyond a quarter forward. I’ve always felt there’s this kind of mismatch.

Jack Altman

There’s a total mismatch. He’ll say something and everybody’s like, “That’s crazy.” Three years later, it’s exactly where we are. Sometimes sooner than that. Then there’s no reconciliation backwards. It’s just like, now he’s said a new crazy thing, and people are like, “Oh, you’ve been crazy all along.” That’s a weird thing to watch and there’s no way to tie that together really.

Brad Lightcap

Everyone’s trying to figure out what’s happening right now, because I think in some sense the whiplash is so real. I have a lot of empathy for that. I spend a lot of time with our customers, with friends, family that are looking at me and calling me being like, “What is going on? What is happening? What is this Codex thing?” I think in Sam’s head we are already so far beyond that point, in terms of what’s coming, that it’s trying to bridge for people where we’re going relative to where we are. I think it’s disorienting.

Jack Altman

It’s really an insane thing that you all have done and continue to do to pull all these pieces together. I think this has got to be the most hard-mode company of all time. It’s very, very impressive. I’m sure you just get used to it all, but hopefully you appreciate what a ridiculous feat you guys are pulling off.

Brad Lightcap

I appreciate that. I very much feel like it is far from complete. It’s highly incomplete. It’s interesting. When we formed the company early on, the mission orientation of the company was very strong. But I always tell people, in a very literal sense, a lot of companies have these high-level, lofty missions that you can’t really actualize. No shade on anyone specifically, but it’s “don’t be evil.” Okay, that seems like a good thing. Or it’s “make the world more connected.” Seems good.

Jack Altman

It’s also like, so if the plan is “don’t be evil,” then what? It’s very debatable from there.

Brad Lightcap

How do you actualize that? What do you do? One of the interesting things about OpenAI is the mission from day one is this very actualizable mission. We try and run everything that we do through the lens of, “Okay, is this consistent with the outcome that we are trying to create?”

I always used to joke at OpenAI: there is a world where we do the thing we say we’re going to do, and then we go home and we’re done. That’s the end of the story and we all go back. In practice, is it going to work that way? I don’t know. I don’t think so. But maybe.

It is a company that has a very specific orientation toward a very specific goal. I think amid all the craziness of all the things that are happening, it’s very focusing to be like, “Okay guys, there’s still this one thing that we are really trying to deliver.” It’s very easy to come back to that mission and say, “Is this something that drives toward that outcome or not?” If it’s not, we’re just not going to do it.

Jack Altman

Love it. This was really fun, Brad. Thanks for taking the time to do it.

Brad Lightcap

Good to see you.

Ron Conway is the Founder and a Managing Partner of SV Angel. He has been an active angel investor since the mid-90s and has received wide recognition for his role in the tech ecosystem. He has been included on Vanity Fair’s 100 most influential people in the Information Age, awarded Best Angel at the TechCrunch Crunchies Awards, and has been named on Forbes Magazine’s Midas list of top “deal-makers” since 2011. Prior to founding SV Angel, Ron was with National Semiconductor Corporation in marketing positions (1973-1979), Altos Computer Systems as a co-founder, President, and CEO (1979-1990), taking the company public on Nasdaq in 1982.

Ron reflects on decades of investing, from semiconductors to AI, and what it really means to be an “all in” partner to founders. He shares how relationships compound into an unfair advantage, why the best investors show up at inflection points, and how being willing to fight, whether in boardrooms or Washington, can change outcomes.

Links:
https://svangel.com/
https://x.com/RonConway

Watch on YouTube; Listen on Apple Podcasts or Spotify

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Clips

Fearless for founders

Ron is the nicest guy you'll ever meet, and he's also the most ferocious defender of founders when he needs to be.

"If you're fighting for a founder you have to be fearless. If I had a gravestone...just 'fearless for founders.'"

The Human Router

Ron explains that his edge isn’t capital—it’s relationships. He’s constantly connecting people, not for immediate gain, but because over time those introductions compound into real outcomes, earning him the nickname “the human router.”

The mindset is simple: meet great people, connect them generously, and trust that something valuable will come out of it.

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

From Semiconductors to Angel Investing

Jack Altman

This is my first go at a live podcast, so I don’t know what’s going to happen, but we both have a sufficient number of microphones. So this will be good.

Ron Conway

I feel rude not facing the audience, but because it’s a podcast…

Jack Altman

The audience is out there.

Ron Conway

My camera is over there. If you’re back there, don’t think I’m rude. I’m doing what we do on a podcast. I’m going to leave the second we’re done because I have Nancy and Paul Pelosi sitting with Gayle and me on the floor of the Warriors game tonight. If you know Nancy Pelosi, she is always prompt and has told me to be prompt.

Jack Altman

We will not be late. We’re going to get to that type of thing as one of your superpowers. Everybody knows who you are, but as I was thinking about this conversation and this audience… We have a bunch of seed investors here in various forms of the job and various stages in their career. You are sort of the archetype of angel investing. You’ve been almost embarrassingly successful investing in Stripe, LinkedIn, Facebook, Google, PayPal, Airbnb, Pinterest. It’s almost more than is reasonable to name.

What I wanted to do was try to open up how you’ve made that happen and how you look back over the decades of your investing and try to glean what an investor in 2026 can learn from you and your success. Can you give your own narrative of your career, starting from when you first got into investing and what played out over time, just to ground us in what your professional life has been all about?

Ron Conway

I think it all starts with age and seniority. And speaking of age and seniority, your mom is here and I want to recognize her.

Jack Altman

My mom’s young. There’s no age.

Ron Conway

I view myself as young too, but I want to recognize that Mama is here. We had a good time at Sam’s 40th. This is why I bring up age, because I’ve been through every technology cycle, starting with semiconductors, which is where I started my career.

I did not like school. I couldn’t wait to get the hell out of school. I left San Jose State and the next Monday I started work at National Semiconductor in the Santa Clara Valley, when most of the valley was fruit orchards and an occasional semiconductor factory. I’ve been through the semiconductor phase, which gave way to the computer phase, that gave way to the software phase, then into the nineties with the internet boom. Today, the AI boom is bigger than all of those combined, I swear to God. It’s hard to fathom. It’s hard to keep up with, but I think we all have that problem because there’s so much change happening at once.

Even in the internet boom, you could keep track of things. Netscape was Mission Central. Netscape is the one that allowed you access to all of this corpus of information on the web. From that we got the internet boom. I was fortunate to go work at National Semiconductor. A few people at National went off and started a company called Altos Computer. They asked me to join. This is when the microcomputers were disrupting DEC, Data General, Prime, Wang. Does anybody remember these names? But this little Altos Computer was upending them.

Technology is all about disrupting. We were disrupting the minicomputer companies, and I love it because I interviewed sitting on the floor. There were no desks, nothing. I was the head of sales, on Walsh Road in Santa Clara, literally five blocks from National Semiconductor.

I was the sales guy, justifiably so. Technology companies are engineer-driven. Our engineering CEO, Dave Jackson, had more charisma… This Brit just oozed charisma, and he helped me close anything that was hard to sell. “You’re the sales guy. You sit next to the copy machine next to the factory.” That was fine with me because I was traveling a lot.

Anyway, we built Altos. Altos went public. We had a very successful IPO.

Jack Altman

What year was this?

Ron Conway

I want to say ‘86. Mid-eighties. Our stock went public at 21. We had our closing dinner at 21 Club in New York. I told my wife when I left, “This is not a normal business trip. We’re going public at the end of this week. We’re going to be what we call wealthy.” She said, “You are so full of shit.”

She happened to go to the bank the day we went public and I sold some stock, and the guy goes, “This is the biggest deposit we’ve ever had.” She called me up in New York and said, “What in the hell is going on? You’ve done something bad.” I said, “No, we just went public.”

Jack Altman

She’s like, “You need more IPOs.”

Ron Conway

I ran Altos, but we ran into bumpy water. Because if you don’t disrupt yourself, you will be disrupted. That’s one of my benchmark sayings: if you don’t disrupt yourself, you will be disrupted.

We were complacent. We had a great IPO, we thought we were king of the hill. Along came this little thing called the PC connected to the Ethernet, which replaced these multi-user systems. So we had to sell the company to Acer for the value of our real estate. I told this to Acer when I was selling them, “This real estate’s worth a hundred million, so it doesn’t really matter what you pay for anything else.” It’s on Trimble Road, that real estate’s now probably worth half a billion.

Then I was out of a job. Don Valentine was our lead board member. Everyone knows Don Valentine, the founder of Sequoia Capital. He came on the board very soon, was the only investor, and came on the road show with us. Don has two sons and a daughter, and like any father, he’s going to see where that daughter goes. He picked Altos out of his whole portfolio because he liked our culture.

Another thing that a founder has to do is build the culture. Some companies have bad culture. They allow philandering, et cetera. That’s not a good culture. Those people are not role models. I’m just not going to name them.

Jack Altman

We can name a couple if you want.

Ron Conway

But culture’s important. Don knew that we built a great culture. We had all these young kids. Dave Jackson’s kids worked there. It was a really cool place and our motto was: play hard, work hard. There was alcohol, but it was on Friday night, and then Monday everyone was back to work.

Don says to me, “What the hell are you going to do?” I said, “Let me tell you, I don’t like managing people.” I found that out because once you’re close to a thousand people, you just become an HR director in my opinion. Some people like managing and God bless those people. We need managers.

Don said, “If you don’t like managing people, why don’t you just come hang out with me, come to board meetings and watch me give founders advice? You’ve already been a founder, so you know what it’s like. Why don’t you become an angel investor?”

I went to board meetings with Don, and in the middle of the first board meeting I was spellbound, because he was giving this founder advice that I knew I could give. So I just started investing in startups on my own, and that led to becoming institutional, et cetera.

Jack Altman

Was there a moment in your early angel investing journey where something important happened? Was there a seminal investment that changed everything for you? Was it a slow build? How did you go from sitting in that first board meeting to getting the traction that you got?

Ron Conway

We made a bunch of investments and a lot of them failed. The very first angel investment I ever made was a company called Natural Language Incorporated, Berkeley, California.

Jack Altman

Sounds like AI.

Ron Conway

AI, yeah. My first investment ever. I’m not exaggerating. I dredged this up after the AI boom, who would care five years ago? It was run by two guys, John Manferdelli and Ginsburg. I forget his first name. That’s how my synapses are working right now. It was way too early for AI. So guess what we did. Like all good founders, let’s go find a home for ourselves.

We went up to Microsoft and Bill Gates was already all over AI, and he wanted the team. So we brought the team up. I didn’t tell him, but we were out of payroll. He goes, “I’m going to buy the company.” I said, “You gotta buy it today.” He goes, “I’m going to buy the company.” I said, “No, we’re going to do it today, because otherwise I’ll go sell to somebody else.”

He got really furious and down came the guy who now owns the Giants, who was the general counsel, because I said, “You can’t leave until we sign the deal.” It became a game. He goes, “How about if I bring down my general counsel? He doesn’t leave until the deal’s done so I can go run my company.” I said, “Yeah, that’s good.”

Manferdelli still works at Microsoft. But the investment that kind of got the clock ticking was Ask Jeeves. Ben Rosen and I… Ben Rosen was a Morgan Stanley star analyst who loved and covered Altos Computer. Altos was always a buy. We all loved each other. He went and started Sevin Rosen Partners. Compaq and Lotus were his wins. He retired from there when I was getting started. He said, “Ron, let’s go do this together. Just investing our own money. Nothing formal.”

Ben sourced Ask Jeeves, not me. The guy on the East Coast sourced Ask Jeeves in Berkeley. Him and LJ Sevin, they each had a private plane, this was years ago, I would pick them up at the airport and we’d go have not a board meeting but a build-the-company meeting. The three of us with the founders of Ask Jeeves built that company together, and it was so much fun.

The funnest part was in the car: me, much younger than the two of them, chauffeuring these two who were pretty old at the time. The shit that they would say and the stories they would tell. It was all about, “We’re going to make Ask Jeeves a huge company.”

Jack Altman

It’s interesting hearing you talk about this, because you’ve used the language of building companies a lot. I know in a lot of the companies you’ve been involved with later—Airbnb, OpenAI—that you really get in there. There’s a reputation a lot of people associate with angel investors that is extremely passive. I don’t think you think of it that way.

What does your experience of angel investing look like when it’s done well? Is it passive or should it be active? What’s the boundary?

Ron Conway

With SV Angel, you are all in or don’t bother. We’ve always taken the approach that… If SV Angel had a moniker, it would be “advocates for founders.” How we approach investing is holistic. We want to help the whole founder. We want to help them advance their career, because when they start they have no experience whatsoever. We want to help them build their team. But along the way they’re going to run into all kinds of stumbling blocks, and we are afraid of no stumbling block.

These are unusual stumbling blocks. I get the call, “My mom just got diagnosed with stage four breast cancer. How am I supposed to run this company and help my mom?” And off we go. We have formed a very close partnership with UCSF in San Francisco, one of the best medical centers west of the Mississippi. We know every department head. They make us go through procedures. Occasionally I violate those and go directly to the head of neurology, like I did last summer for a luminary in this valley.

I’m digressing here but his name’s Andy Josephson. I was in Venice. I got a call in the middle of the night from your brother—hint, hint what company it was—and I went to work. Before morning, Andy got the hint, because I said, “I want to know what doctor you’re going to assign.” He gave me a bunch of names and I said, “Give me a name.” He goes, “How about if I am the attending?” The head of all neurology at UCSF. I said, “Andy, took you a while, but you got it right. He’s in the car now coming to see you. I don’t want anyone less.” So what we do is bring some comfort to the founder and the family.

Jack Altman

You’re talking about the ability to do that, and right after this you’re leaving on time because we’re going to go see Nancy Pelosi. Part of my experience with you, when you invested in my company Lattice, was that somehow—and I knew you were involved in a lot of companies—if I called, you answered. You connected me to Marc Benioff and then he took it.

Ron Conway

Don’t ask me to do that now.

Jack Altman

One time ask.

Ron Conway

We don’t have troops and I don’t talk to Benioff.

Jack Altman

Politics comes in 20 minutes. But part of what allows you to do what you’ve done must be having the ability to be a power broker and to have these connections. There are firms now who have built a brand around that, Andreessen comes to mind, but you’ve done that on your own. You’ve been able to be in touch with the right regulators so that you can help a marketplace running into issues with the city, or things like that with the hospital, or CEOs of big companies.

What did it take to get to a place that let you have those relationships where you could help companies in a real way with a small amount of your time? Because I feel like that’s the only way this works.

Ron Conway

First, everyone at SV Angel has an attitude of: we are always on for founders. We’re advocates for founders. We’re always on. If they have a problem at two in the morning and I’m in Venice, I’m picking up the phone. But instead of the word “power,” I would swap in the word “relationship.” SV Angel has built a relationship network that no VC comes close to. Andreessen Horowitz has tried and succeeded. Marc and Ben take tiny salaries and they have the huge service org. But some of it is organic.

For me, it’s because I started my career at National Semiconductor. Guess what Steve Jobs did when he started? First it was semis and then PCs. When Jobs started the PC, the only place he had to go to find executives was the semiconductor companies. So he went and got Mike Markkula to be the chairman, and he got Mike Scott, who was the head of hybrid semiconductors at National Semiconductor, to be the president of Apple. I’m sitting in Mike Scott’s office one day and he goes, “I’m going to Apple.” I said, “What the hell is Apple?” He goes, “It’s this microcomputer thing and I’m sick of building semiconductors.”

Then Jobs came back to get Floyd Kvamme to be the first VP of Marketing of Apple. So based on National Semi, I had two relationships at Apple Computer. Then just imagine that flywheel going for 40 years. I went into software, I got to know every single software executive, a bunch of them peeled off and went to internet companies.

So when our founders need help, I have this Rolodex. Some of them are getting old, but I have this Rolodex of any company. What was fortunate is we ended up investing in some of the defining companies: Google, Twitter, Meta…

Jack Altman

Which creates more relationships.

Ron Conway

That a lot of our founders need distribution deals from. We built the management teams of those companies. Those are very easy calls, to call Chris Cox and say, “Hey, I’m sending somebody over.”

The Human Router

Jack Altman

I assume you think that being a relationship broker is very important to being a good seed investor.

Ron Conway

It’s our most valuable asset.

Jack Altman

What do you do to nurture those relationships? Obviously it couldn’t have happened without some of those early relationships, but there are a lot of other people who have early relationships like that who don’t turn into a relationship broker the way you have. I’m curious if you can talk about some of the things that you’ve done to authentically build those.

I’ve watched you at an event where you pull two people together at a party and say, “You guys should talk.” You’re not going to get anything immediate out of this, but you’re constantly brokering these relationships. So what’s going through your head as you navigate the world to cultivate this?

Ron Conway

First of all, you have to have a personality where you enjoy meeting new people. I love meeting new people. My wife hates meeting new people. I would imagine 40% of the population hates meeting new people. They’re shy, they’re not interested. There are various reasons. I happen to love meeting new people, so I love gathering people. If you don’t have that trait, it’s going to be harder for you.

I love connecting people. Marc Andreessen calls me the human router. That’s a compliment. I love connecting people, because something good is going to happen. If I made a list of all of them, it’d be a long list.

Jack Altman

So you’re obviously not keeping track though. You’re just doing this and who knows what’ll happen.

Ron Conway

I keep track of the big ones, actually. Very key intros. Somebody yesterday was telling me—I wish I could remember—but they were bragging about this thing and I said, “Who do you think did the original intro?” They kept talking and I said, “I did that intro.” Then they looked at me like I was nuts. I just described it exactly and they go, “Oh yeah, you obviously put that deal together.” I said “Yeah, we put it together, but then I moved to the next one. We have a lot of founders, and there’s a lot going on.”

Jack Altman

Is it a constant background function for you as you’re meeting people, who could I be connecting here?

Ron Conway

Oh yes. We love helping all founders. Cloudflare, that company had all kinds of problems in the early days. I helped that company because they were part of the ecosystem. If a founder stops me and has a problem I can solve, I’ll solve it.

Here’s a good one. The founder of Zoom, Eric Yuan, accosted me in a parking lot a long time ago as I’m getting in my car. He goes, “I actually alarmed you” and he said, “Guess what you did for me.” I only saw him again after Zoom. We ran into each other somewhere and he said, “We’ve got to talk about the parking lot.” I said, “What parking lot?” He goes, “You sat in a parking lot and gave me a whole bunch of advice at the beginning of my career.” I said, “Yeah, that’s fun.”

Jack Altman

It’s interesting because as a seed investor if you wake up one morning like, “what should I do today”, the common body of work is “what are the companies I should go try to meet and get time with?” I feel like there’s another orientation, which you very much have, which is just “who could I be connecting today? Who are the people I know that I could be putting in touch with each other?” I think that’s something that you have to have a long-term commitment to. You can’t just do that once.

Ron Conway

It’s a commitment to the ecosystem. The tech ecosystem in the Bay Area is really important.

Jack Altman

Do you go out of your way to build relationships in other ecosystems? For example, are you ever thinking, I should go meet people, I should go spend time with this part of the government or these people in Hollywood? Because you just know that somebody in tech will need this.

Ron Conway

Very premeditated. Media, we were way too early. We were poking around Hollywood in like 1988 because of Len Armato, Shaquille O’Neal’s agent. This is the height of the Lakers. He was a tech nut and he goes, “It’s all going to happen tomorrow.” Streaming audio, video. We invested in audio and video companies way too early.

Now we did not invest in YouTube, but I sat in the rat-infested place in San Bruno with Chad and Steve, because that’s a company I knew was exploding. That one, I actually drove, parked, put money in the meter, went in and said, “Guys, I want to be of service. Video’s going to explode.” But then we had all the copyright shit, and I feel so sorry for them. Chad, by the way, sits two seats down from us tonight. They knew they had to sell.

Thank God they sold to Google and we know what happened to Google stock. They deserve all of the benefits those two have gotten, but they knew they didn’t have enough lawyers and infrastructure. There is a right time to sell. So we tend to actually predict stuff kind of early. Look at Natural Language.

Jack Altman

If you’re thinking about going deeper with the government, because you’ve got a lot of companies bumping into regulations, you’ll go to DC for a week and just spend time with people? What does it look like?

Ron Conway

I’ve always felt like the tech industry should be civically engaged generically. We have to vote. We have to tell legislators about all the jobs we’re creating, and if we run into trouble, they should be loyal to us because of job creation. The reason I love Nancy Pelosi, you say “job creation” to her and she doesn’t care what it is. If it’s creating jobs, she’s going to help, she gets it.

But there are a lot of lawmakers—Bernie Sanders, God help us—who don’t get it, who want to demonize tech. All they’re doing is costing America jobs. That’s not fair to anybody. So yes, I’ve made it my business over the years to always know the two state senators, know the governor, know Nancy, and Schumer. Building a relationship with them is hard.

Jack Altman

But it’s true, coming to those relationships transactionally is never going to work. They have everybody coming to them transactionally all day. I guess you did it naturally, but you built those kinds of relationships over the course of your career. Of course, to be able to help the next person, you’ve got to have done something before.

Ron Conway

Exactly.

Inflection Points and Fighting for Founders

Jack Altman

Before we come back to politics, there are a couple more investing things I wanted to get your take on. There are a few times where I’ve observed you going really deep with a company. Maybe you made a small investment early and then you might have invested more. You take these really deep engagements. I know you’ve worked with my brother at OpenAI. I think you’ve gone deep with Airbnb.

How do you think about that work as it relates to the business of angel investing or seed investing? Looking back, has doing that with a small number of companies been important? Was it just fun? Is it both?

Ron Conway

SV Angel always gets involved at what we call inflection points. We tell founders that we’re not going to bother you, we’re not going to look over your shoulder. But if you’re at an inflection point where it’s life and death, that’s the shit that we’re good at. So you come to us when you’re at an inflection point.

COVID hits and Brian Chesky’s board tells him, “Jesus, do we have a company?” Poor Brian was struck by that and calls me, and I said, “You bet your ass we have a company. You’re going to have to make some hard decisions.” He already knew what they were. He was going to have to lay off half the company. These founders are smart. But that was a crisis where he was being told that the game was over, and I was like, “The game is not over. The game is just starting.”

It was so bad. I said, “Hey, this is COVID, COVID’s Armageddon. When the three of you are free—Joe, Nathan, and Brian—you call me. I don’t care if it’s three in the morning, but I’m going to give you a little lecture about who’s in charge here. You’re in charge of your own destiny.” I knew we could go raise, I forget, a couple of hundred million.

They were told that they could not raise anything. Zero. Do not bother to raise money. You can’t raise money. There’s this thing called COVID. I said, “You’re being given a bunch of shitty advice, and we’re going to go raise the money.” In ten days we had the money. We didn’t have it where I thought we were going to get it, but that didn’t matter. We got it from Silver Lake in some fancy instrument. God bless Silver Lake. Silver Lake’s quite happy right now with that.

So these inflection points, they’re kind of obvious. A founder who’s really in need…

Jack Altman

They matter so much to a founder.

Ron Conway

We’re going to put all of our stuff to the side and go help. The Silicon Valley Bank crisis, which hit the day of our founder summit three years ago, was definitely the most consequential project I’ve ever worked on. I never thought about it that way until just a couple of months ago, because I was having dinner with Wally Adeyemo, Deputy Secretary of Treasury under Janet Yellen during SVB. He said to me, “Do you understand what you did and how it came down? You got really nasty at the right time.” The government wasn’t doing anything and all they needed to do was guarantee the deposits.

Jack Altman

So what did you do?

Ron Conway

I didn’t sleep for three days. But by Sunday morning, about six hours before the Tokyo Stock Market opened, we had to have this solved or there was going to be a worldwide financial crisis. We had people in Washington, DC who just didn’t get it.

By Sunday morning… Sherrod Brown’s one of them, the head of the banking committee. We can’t spend too much time on this. But the FDIC, which is the one who had to process the guarantee of the deposits, they wouldn’t budge. I didn’t realize it but they only report to Congress. It’s very unusual because I’m like, “Who’s your boss? I’m going to go talk to them.” And Nancy Pelosi, everybody.

Their boss is Sherrod Brown and Maxine Waters. Sherrod in the Senate, Maxine in the House. So I was talking a lot to Sherrod and Maxine. By Sunday morning I got very firm with them like, “You are going to be responsible for a worldwide crisis. I don’t know what the hell you’re doing, but get off your duffs and make the announcements.”

Jack Altman

It’s an interesting thing about you, because I feel like you, as you said, you love people. You’re incredibly supportive of people, you’re there for them in their times of need. But this story is an example—and there are a lot of other examples too—where you’re also not afraid to fight and you’re really willing to fight.

Can you talk about an investor’s role in those situations? I think there was a story recently where Neil at Greenoaks was in a real fight with government for a founder. I think that’s really important to do. You’ve been willing to do it, but it’s different than the “I love people, I’m going around and meeting”... It doesn’t naturally show up. I think from you, it’s coming from a place of “I love my founder, so I’ll fight for them.” Can you talk about the mindset that lets you go fight?

Ron Conway

You have to have conviction and know how to wiggle your way in to solve that problem. The OpenAI coup, when Sam was asked to leave, was a good example. I had conviction that the founder had been mistreated, and we were going to make that right. We were taking no prisoners. We knew what we had to do and we went and did it.

Jack Altman

Do you think in general Silicon Valley lacks the toughness needed in a lot of cases? I feel like other industries often will do this sort of tougher work at a higher rate. Do you feel like enough of it happens in tech?

Ron Conway

Probably not. There are a lot of companies that go out of business because they shouldn’t. The other thing—this might sound trivial—but I do not like losing. I am competitive.

Jack Altman

You have to be okay with being disliked or having people mad at you.

Ron Conway

I think if you’re fighting for a founder, you have to be fearless. If I had a gravestone, it would just say “Fearless for Founders.” That’s what we’re about, because founders do get abused. What happened to Sam is unconscionable, but this does happen. When that happens, we don’t like it and we get the blinders on until we fix it.

Thematic Investing

Jack Altman

I love it. One other investing topic I want to ask you about, and then I want to talk a little bit about politics. I want to hear about the way you think about building portfolios. SV Angel has had remarkably good returns. You’ve taken a pretty diversified approach in general. You’ve made a lot of investments, then you’ve hit some really big companies.

What’s your mindset when you think about what seed investing should look like in terms of concentration or exposing yourself to enough companies?

Ron Conway

Today it’s kind of easy because everything’s AI. But if you go back 40 years, SV Angel has always been thematic investors. I like what I do because it’s interesting, and I watch founders succeed. Watching Jack Dorsey go through shit at Twitter, he resurrected Square. It’s the best thing that you could ever witness.

We’re always thematic. We’re thematic because it’s interesting. So when I first started, I said, “What the hell do we think is going to explode? You’ve got Yahoo and AskJeeves and Lycos. There were ten search companies. Something must be going on in search.” So search became a theme. B2B became a theme. We’ve always been thematic.

We have this piece of paper. We’re always looking at probably six themes. Any company in that theme that comes in the door, we’re going to at least take a look at. If it doesn’t fit those themes, we pretty quickly turn them down.

So SV Angel is very thematic oriented. Now within AI, we have to be thematic within AI because everything’s AI. But we’ve always been thematic investors.

Civic Engagement and the California Wealth Tax

I know we don’t have that much longer, and I really want to talk to you about politics. I know it’s something that’s important to you. You talked about how you think it’s really important for people in tech and companies in tech to be engaged.

I know right now you really care about what’s happening at the state level. In particular, I’d love to start by talking about the wealth tax that is being proposed. I know you’ve been fighting it and you care a lot about it. Can you talk about why you think it’s a bad idea?

Ron Conway

One more global thing, SV Angel has always been civically engaged and encouraged founders to be civically engaged so that you know your local politicians. So when you have a crisis, you have a relationship. But we’re also philanthropically engaged. We believe founders want to give back. Guess what? You have this byproduct that morale explodes when the company also has a philanthropic bent.

But right now on this state wealth tax… I hate to be pessimistic, and I’m not normally pessimistic, but we have a crisis. We have one SEIU union that’s associated with healthcare who has a ballot proposition. They need 900,000 signatures for it, which is possible. When they get that, it will go on the ballot.

On top of all the other taxes we pay. It’s a 5% wealth tax on every asset that you have. So if this happened, they would go through your house, appraise every piece of art, appraise your car, and whatever that is, you pay 5%.

What makes it worse is if you have voting control, like Larry and Sergey do. Larry and Sergey, let’s say they own 10% of Google today, but they have 80% voting control. Zuckerberg has the same thing. A lot of founders have this. This horrible piece of legislation says your tax is based on whatever that top number is. So even though Larry and Sergey own 10% of Google, they want to tax them for 80% of the market cap of the company. That is why Larry and Sergey had to leave. It wasn’t multiple choice for them.

So this is one of the most onerous proposed ballot initiatives. Our job is to get Gavin to negotiate this so that it doesn’t get to the ballot. So maybe they don’t get the signatures.

Jack Altman

Because you think if it gets to the ballot, it’s got a good chance of going through?

Ron Conway

It could. We can’t let that happen, in my opinion. Gavin knows that and Gavin’s with us on that. So if they get the signatures… They only have money for the signatures. They don’t have money to even run a campaign. So they’re not thinking that well. At that point, there needs to be a negotiation to keep it off the ballot. That’s why there are counter ballot initiatives against this also getting signatures. We need a couple of those to get the 900,000 signatures as well, because that will give Gavin some bargaining chips.

The other labor unions are furious at the healthcare guys. Imagine what you think the teachers’ union thinks of this? And all the other unions.

Jack Altman

This is all driven by the healthcare union?

Ron Conway

It’s just one isolated healthcare union. There are even other healthcare unions. This is just one guy who is self-appointed. So the other unions, they’re watching what’s going on, their blood pressure’s going up. That will be another negotiating lever that Gavin has. We must keep this off the ballot. A whole bunch of work has to happen.

Jack Altman

Obviously you’re putting a lot of work in now. Were you doing this work earlier in your career as well, or is this something that you’ve gotten into later in life?

Ron Conway

No, we started with SOPA/PIPA when music first came to the internet. I hate to say it, Orrin Hatch and Dianne Feinstein… All the media people said, “Oh, they’re going to take all of our music away.” Also, Napster, we were the first investors in Napster. So we got involved in SOPA/PIPA when they tried to outlaw media generated by the internet on the web. This is crazy.

Topher, remember this? I was the rookie and all these other lobbyists were telling us what to do. I said, “What the hell do we do? We’ve got to stop this. This is crazy.” They said, “You should go down to City Hall and stand on a soapbox.” I said, “Oh, I’ve heard that saying all the time.” They said, “No, we’re not kidding.”

Jack Altman

Literal.

Ron Conway

We were in the middle of our weekly meeting, and they said, “Get down to City Hall. There’s a whole bunch of cameras down there. You go down, literally get on a soapbox. We’ll meet you there. You give your speech. A lot of good shit’s going to happen.” I felt like a fool. I got on the soapbox, gave my lecture, lots of cameras, and we started to turn the tide.

Shawn Fanning helped a lot with that. I remember Shawn Fanning happened to be with Orrin Hatch that day, and I said, “Shawn, whatever the hell you’re talking about, stop talking about that and tell him about this.” He was the first senator to say, “I’m voting against this.” My pal Shawn Fanning.

Jack Altman

It goes back to the thing I said earlier about your willingness to fight. I think a lot of people don’t do this, even if they believe certain things, because they’re like, “I’ve got to go have a lot of people mad at me. If I’m running a company a lot of things internally might come up. Or the media’s going to say things, and I’m tired and I’ve got a family and I’m busy.” I think a lot of people don’t do it not because they don’t care, but because it takes a lot of courage and energy.

Ron Conway

You’ve got to recognize the problem, want to solve it, have conviction, and want to win. And off you go. In my later years, because I’m the one doing it and I’ve done enough of these, I can call people up now and say, “You want to do it the hard way or the easy way?”

Jack Altman

God, I would hate to get that call from you.

Ron Conway

I did one today.

Jack Altman

That’d be tough.

Family and Legacy

Jack Altman

You mentioned Topher. You have three kids and you’ve worked with your kids over the course of your career. I think that’s a beautiful thing. I’ve got kids and it’s something I’ve thought about. I’m just curious what that’s been like for you. It seems awesome.

Ron Conway

It has been awesome. I did not ask my sons to get into the investing business. I thought it was interesting, but I don’t tell people it’s interesting. But one by one they all left jobs in LA—because they all went to UCLA—and came up and said, “Hey, this looks pretty interesting.”

Topher left his job in LA and said, “I just want to come find a place to work. So I’ll sit in your weekly meeting and pick a company and start interviewing at a bunch of companies.” Three weeks later he goes, “I don’t want to interview. This is interesting just sitting here.”

Jack Altman

It just seems like such a good way to have an adult, ongoing relationship with your kids.

Ron Conway

Of course. We all operate out of the same office. Ronny has A.Capital, Danny has Symphony. We love founders.

Jack Altman

So good. Ron, thank you so much for doing this. You’re a total legend. I love learning from you. Thanks for making time for it.

Ron Conway

It’s a pleasure.

Jack Altman

Now you’ll be on time with Nancy.

At 23, with no legal background, Max Junestrand co-founded Legora to transform how lawyers work.

Legora recently (March 2026) raised $550 million at a $5.55 billion valuation in a Series D funding round to accelerate its expansion across the United States. Over the past year, Legora has grown from 40 to 400 team members across the globe and the platform supports tens of thousands of lawyers each day across 800 customers in more than 50 markets.

Max shares the story of building Legora, what it really means to build AI-native software from day one, why legal work is uniquely suited for AI, and how a small team from Stockholm convinced some of the world’s largest law firms to change how they work.

Timestamps:
(0:00) Intro
(0:31) Legora's origin story
(9:05) Building an AI-native company
(18:16) No sacred cows, the models will be amazing
(27:36) Winning pilots and global expansion
(36:43) Starting in Europe
(47:15) Stockholm culture and "blodsmak"

Links:
https://x.com/MaxJunestrand
https://x.com/chetanp
https://x.com/jaltma
https://legora.com/

Watch on YouTube; Listen on Apple Podcasts or Spotify

Subscribe now

Clips

The untold inception story

They were working on this intersection between AI and law for three years with the early BERT models and even a Swedish trained version called SweBERT, it was impossible to work with.

Everything changed with GPT-3.5, which convinced them to go all-in on the space even before they knew the exact product.

The models are no longer the bottleneck

AI models are no longer the main limitation. The real challenge now is building the surrounding software systems that let models operate in real workflows while humans can review and trust the output.

In other words, the frontier has shifted from better models to better products that integrate those models into the real world.

No sacred cows, the models will be amazing

Founders who never built companies pre-AI have at least one big advantage: they have fewer preconceived notions about how to build a company.

This applies to how software should be built, when a product that people worked really hard on should get dissolved, what tools finance should use, how GTM should work, or really anything and everything else.

“The culture is: you don’t maximize for your function, you maximize for the company.”

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

Legora’s Origin Story

Jack Altman

This is going to be a cool new format. I’m here with my new partner, Chetan, and Max. Max, you’re the founder and CEO of Legora, which is an amazing legaltech company that Chetan sits on the board of. I just feel really lucky to be doing this with both of you. Thank you for making this happen.

Max Junestrand

Thank you so much, Jack. It’s great to be here.

Jack Altman

I want to start with the topic of competition. Chetan, when you invested in the company, there were already competitors out there. This was only two years ago. It’s crazy because Legora is a big company already.

Max Junestrand

Almost 400 people.

Jack Altman

The seed was two years ago. At the time of the seed it was an early market, but there were competitors out there. I actually want to start with you, Chetan. What was in your head at the moment you invested? Were you thinking about the landscape around? Were you just thinking Max was so special that you didn’t care? What was going through your head when you did that?

Chetan Puttagunta

The first meeting that we had with Max was with me, Peter, and Max in the other room. Interestingly, I had invested in two other legal software companies, pre-AI. So there was a shape of the legal market that I intuitively understood because I participated in the market. I understood the different kinds of lawyers, who buys software, do in-house lawyers buy software, do law firms buy it… There was an intuitive understanding that I had. There’s two things that happen when you’ve sold into an industry before. Either you end up hating it or you have some strong bias against it.

There was always this idea that there’s opportunity for AI in the legal market. There was a player in the market that had already raised at a billion-dollar valuation. When Max came in to chat with me and Peter, the thing that immediately jumped out was the clarity of thought that Max had on why the general foundation models had a lot of room to grow in intelligence and how that was going to be a huge boon for the legal profession over the next couple years. He had this very strong viewpoint that there was something about legal data that the general models were going to serve in a very unique way.

Jack Altman

Max, since you’re here, can you explain what that was?

Max Junestrand

It’s worth going back to 2023 and 2024 when part of the paradigm was that you should train your own models and the general models aren’t great and fine-tuning is going to be really important. For two reasons, we were like, fuck that. One, fine-tuning doesn’t really seem to work, at least on the scale that we were operating. To train the new generational model, you had to put billions of dollars into it.

Secondly, there was so much application that you had to build on top of the models to make them useful in your environment. Back then, just solving basic data, compliance, privacy, and great file uploads and great parsing and great chunking and all of these things, that was where the value was.

Chetan Puttagunta

There was another part of your experience, which was that you were actually embedded in a law firm. So you were studying the shape of what data law firms had in a way that was… Bill talks about this a lot — does an entrepreneur strike you as a learn-it-all? It was clear that the early Legora team—when we invested it was five people—was just trying to learn everything they could about how the legal profession worked and they didn’t have any bias towards it.

The other thing Max said, which you should share with everyone, is that because they were embedded in a law firm in a windowless conference room in Stockholm—

Jack Altman

Sounds nice.

Chetan Puttagunta

Sounds great. They had a deeper understanding of the data model of a law firm in ways that most of us didn’t.

Max Junestrand

Just to take it back even further, when we started, I offered to buy a lot of lawyers lunch on LinkedIn because I wanted to learn. I would literally cold write them and say, “Hey, I’d love to meet, I’d love to talk about IP law. I’ll offer to pay you your hourly fee and lunch.” They were all too nice to make me pay for lunch, and they’re often not even paying for it. But as Chetan put it, I think it allowed us to work with customers from the very beginning. The founding team at Legora were all engineers. The first lawyer didn’t join until nine months into the journey.

Jack Altman

When you had a lawyer join, had you already set the plan and the goal for the company? Was that done without experts? Was that important to do without experts?

Max Junestrand

It’s actually funny. This is a bit of the Legora untold, first revealed here. The company formation was in 2020 and there were four co-founders.

Jack Altman

I didn’t know that.

Max Junestrand

And I was not one of them.

Jack Altman

Didn’t know that either.

Max Junestrand

They were working on this intersection between AI and law for three years with the early BERT models and even a Swedish-trained version called SweBERT. It was impossible to work with. Not only was it not very intelligent, it was also blatantly racist because it had been trained on Swedish forums.

Jack Altman

Some racist data there.

Max Junestrand

When the LLMs like 3.5 came, that was when the moment shifted. We turned this into a company. Two of the co-founders left, I joined. We basically said we’re going to work in the intersection between AI and law. We don’t know what that product is, but we’re going to run like hell in this direction.

Funny enough, the first lawyer who joined was a soon-to-be customer of ours. He was the CIO at one of the big firms in Sweden that we wanted to sell into. He had built an early version of a GPT plus the document management system, basically an LLM that could RAG into the existing precedent and data that the firm was using. He basically said, “These guys are going to run faster than me, and if you can’t beat them, I might as well join them.” That turned out to be a good decision.

Jack Altman

Are you surprised by how strongly the legal market has adopted AI? If I had thought in 2023 or 2024 about what’s going to really adopt quickly, I don’t know if I personally would have seen it coming that lawyers would be near the top of the list. You’ve invested in stuff before too, so I guess this is for both of you. Has it been a surprise over the last two years, the rate of adoption?

Max Junestrand

Yes. It’s been vivid. But second and maybe more importantly, the law firm market is very interesting because it’s this perfect equilibrium with, frankly, pretty low differentiation. If you need to do a VC deal here in the Valley, you could go to any of the top five firms and you’re going to get roughly the same thing. If one of them starts leveraging Legora to offer a better service at a better price point faster, all of them have to adopt it. So the equilibrium shifts down and then everybody has to move.

What happened in the law firm market was that as soon as one big firm in a market adopted Legora and went public with it, everybody else had to do the same. That’s not necessarily the same in the in-house legal sector. If one big bank has it, another big bank doesn’t necessarily need it.

Jack Altman

But was there something about the process of the way work got done, or the structure of it, that allowed Legora’s product to drive so much value so fast in a way that it did force that sort of prisoner’s dilemma?

Max Junestrand

I just think the legal sector was so underserved with great software for such a long time that there was a lot of built-up problems that we could easily solve with LLMs, but that were really hard to solve pre-LLMs.

Chetan Puttagunta

I also think you guys had a great insight early on, which was that there was a deference in respect to the customers. That lawyers are really smart. They’re extremely well-educated, they’re tech-savvy. They’re not programmers, but they’re very tech-forward. They use the latest software, they use the latest devices. So they were all going to be playing with ChatGPT and Claude. If you showed up with a legal AI product, it had to be better than the foundation models. Otherwise they were just going to say, “Why are you deserving of my dollars?”

Max Junestrand

Microsoft Copilot rolled out very quickly. Every law firm in the world is a Microsoft shop. Everybody works with Outlook, Microsoft Word, and where they store their documents basically.

Building an AI-Native Company

Jack Altman

To the point of you have to be better than the models, if you had to break down, as a vertical AI application, what have been the things that have allowed you to be so much better than the models that it’s worth the incremental investment?

Max Junestrand

In the beginning there were a lot of just foundational problems with the models. You had to guardrail them very hard to make them useful. You had to build citations, you had to build good RAG systems, you had to overcome context window problems. There were a lot of rate limit issues, so you had to juggle different models for different types of tasks. There were just so many incremental, basic things to solve.

As time has progressed, our product has moved further away from what the foundation models are and much more into this enterprise-wide platform where we’re going to transact billions of dollars of legal work on the platform. We’ve moved from building a lot of the agent work ourselves and we let the models rip a little bit more, like OpenClaw or ClawdBot or whatever it’s called these days. With Opus 4.5 and Opus 4.6, there was an extraordinary difference in level of intelligence and instruction-following capability.

So I see our job as: let’s provide the model the right environment and the right tools and skills to leverage, then let’s build a UI and an interface with the rest of the business so that they can all leverage it comfortably and with a lot of trust. I do think that the model capabilities improving so quickly makes us run faster, because we have to be three standard deviations ahead of any general capability. That’s a very good motivator.

Chetan Puttagunta

As somebody that’s invested in a lot of software companies, one of the unique things about an AI software company is that it’s tactically built differently than a traditional software company. I think it’s becoming more known now, but when you guys first started and built up this org, the way you designed the org made a lot of sense for the product you were building and what you just described. We need to deeply understand model capabilities and then bring that to our customers in a way that’s deeply differentiated. As you explained to me, that meant you needed to invest heavily in understanding the models, which then would lead to understanding what to build. But as models go better, your features may not matter in six months.

Max Junestrand

Yes.

Chetan Puttagunta

Talk about how that led to an organization that was heavily technical, heavily engineering and researcher-led. For a company as big as you are, you have very few product people. The number of product people you have essentially rounds to zero. You have a couple of leaders, but that’s it.

Max Junestrand

The founding team were three engineers. The most natural hires were where we were like, let’s grab all the smart engineers that we know from college and add them into the org. In the beginning, we had to build our own agent framework because LangChain and these things that we initially built on couldn’t get customized to the level that we needed, back in 2024.

As we understood more about the model capabilities and the problems we wanted to solve… Let’s take due diligence as an example. It’s really hard to solve a due diligence task in a chat-based format because you need to review hundreds of documents. Hundreds of documents are never going to fit into the context window of a single model call, at least not back then and probably not now either. So we built this new product that we call Tabular Review. It’s a big matrix where you would throw in tens of thousands of documents and throw in all the prompts, and it started running all of them in parallel. What we basically did was say, three engineers, you’re now on Tabular Review. This is your own company. Run.

Over 10% of the EPD org at Legora is ex-YC founders. Our head of engineering who joined, Jake, was a solo founder in YC. Our VP of product, Adrian, was also a legaltech founder in YC and happened to be both a GC and a lawyer. As we progressed, engineering and product have stayed at the core of who we are and what we do. I also think that everything else is an expression of that. We can only market what we actually build. We can only sell what we actually build, and product lead compounds.

As you put it in the beginning, we did not show up first. Legora was not the first product that many legal teams looked at because there were earlier entrants. So we knew that we had to show up and be best. If you want to be best, then you need to invest in product, you need to invest in engineering, and you need to build that culture of reliability first. We actually had a time period in the company for six months where we didn’t sell, basically, because we weren’t ready to hit the gas on onboarding a thousand lawyers a day and knowing that the product was going to keep up with that. So we took the early hits of investing in that.

Chetan Puttagunta

Talk more about that period specifically. The seed round you did with us was in March of 2024. The product went to GA October 1st, 2024.

You called me early September 2024 and said I need to come to Sweden because all of us need to sit in a room and just talk about where we are and what we need to do to get this thing out in a month. We came and sat with the whole company. It was literally the whole company, which wasn’t that big back then, only 20 people. It was the whole company, the founders, chicken wings and beer.

And peanuts actually. Those were the three things served. There was a very open dialogue of, how do we get this thing out in 30 days? Because at that point, you essentially weren’t facing the market test. You were building. There were 10,000 things you could build. The outcome of that discussion was that we’re only going to focus on three use cases.

Max Junestrand

That’s right.

Chetan Puttagunta

So talk about one, you calling me to tell me to come to Sweden to have that discussion—

Max Junestrand

And you actually showing up.

Chetan Puttagunta

I did show up. Reflecting on it, that was one of the most important things that you and the founders did in the company, at that moment saying, we have 30 days to go. We’re just going to sprint at these three things, not the 15 things that we could do.

Max Junestrand

There was this feeling of: you get these LLMs, they’re so powerful. We learn about all these use cases in the firms and with the clients that we work with, let’s go solve all of them. Wrong decision. You can’t solve 15 things at the same time. We had to kill a few darlings and really double down on the stuff that we thought was going to work.

We looked at the market and basically saw a few things that were really working as a paradigm for LLMs in legal. One of them was this big tabular extraction. Another one was embedding it deeply into Word and Outlook, basically having Legora be accessible wherever the lawyer is already working. We were still called Leya back then, this was very early. We took the entire company and had a town hall. I remember showing some numbers where a particular company that just had one of these features was doing more revenue than us. We were doing 1.5 million at the time.

That felt very painful because we thought that we had a better suite, but we didn’t have as much revenue because we were based in Sweden and we were mostly selling to European firms at the time. So we just said, let’s do these three things. Let’s do them better than anyone else, and it’s going to be worth it to buy our suite over anybody else’s.

I wrote this very short product manifesto, sent it out to the entire company, and we rallied the troops. It was off the back of that that we had our first quarter where we doubled revenue. We went from 1.5 to four. We were like, oh, this is ripping and it’s flying off the shelves. Then in Q1 we had another quarter where we doubled, going from four to eight. Whoa, okay, now we’re talking. It became time to launch in the US. We hired Patrick and Evan who joined from a competitor, and we had our first boots on the ground in the US. Then we felt okay, what we have is a winning formula, so we just need to crunch it out everywhere.

Now I think we’re at another interesting point in time where we’ve built all these different tools, but the paradigm from now onwards is that humans are probably not going to work with all these tools. Agents will basically leverage the tools that we built. I remember when MCP came, our CTO basically went, “Now Legora has two users. It’s human users and agent users, and every new feature that we build has to be able to cater to both.” Now we’re seeing more people basically use our agent that uses the tabular grid, or our agent who uses our word editing capabilities, than humans actually going and using those features at all.

No Sacred Cows, the Models Will Be Amazing

Jack Altman

Chetan made a cool point to me recently.  We were talking about how companies that are pre AI and companies that are fully AI native just have to be built differently in various ways. Because you didn’t build a pre-AI company, I think it gives you this unshackled mind. You’re not even trying to think about some past alternative. You’re just like, given what’s in front of me, what should a company look like?

You talked about how having YC founders inside the company has been helpful and I’m sure there’s a lot there. I’m curious, what are the main tenets that you’ve observed? Because now you’ve probably hired a lot of people who did work and built companies pre-AI. What do you think are the main tenets, ideas, and cultural concepts that have been important to you, just to make it work in a fully AI-native world?

Max Junestrand

I think this idea that Chetan brought up—you have to be willing to kill the stuff that you’ve done in the past—is very important. In more traditional software, you have to build the foundations and then you build the stuff on top of it and keep building the stack. In that world, it was also very good to have a technical architecture where one feature would rely on the same microservices as other features.

But the problem is, in AI, maybe that feature now needs to scale really quickly, and the cost of writing software is so low that it’s basically better to build your own stack for each thing. Now that we hire finance professionals or even lawyers internally to Legora—we just hired our first tax person—they come with a set of ideas. “Oh, this is how I used to do it in my old company.” Everybody’s forced to relearn, and also question what their value is on top of the general model capabilities, which was very painful.

Jack Altman

Totally. Bret Taylor talked about this on this podcast too. Basically people are going to build something and six months later we might just kill that thing and everybody needs to be comfortable with that. Historically, that would be a lot of painful internal conversations. Do you have to change? Is that a different culture for people?

Max Junestrand

I think it’s a different culture completely. The culture is that you don’t maximize for your function, you maximize for the company always. I’m very upfront with every exec who joins Legora that, in a way, you’re joining with an expiration date. You have to continuously prove that you scale out of that, because the company is scaling so exponentially. I don’t know if it was Mark Zuckerberg or somebody who talked about hiring people with high y-slopes and not high y-intercepts.

I think about that a lot, mostly because I’ve had to do that. I did not join or start Legora with a lot of experience, but I’ve proven that at every new point in time I’ve scaled with the business. Other people at Legora need to do the same. I think that goes for every function. An engineering team that’s shipping the amount that we do, previously had to be 500 people, and now we can get away with being 50. There’s even a question of whether we need to be more than a 100 engineers, or is the bottleneck really knowing what to build and building it the right way, and designing an experience that works for hundreds of thousands of people that we now have on the platform.

The paradigm is shifting all the time. What’s nice about our work is that engineering is a roadmap of what’s going to happen in other industries too. The general models have come the furthest in coding, but also those organizations are very quick to adopt and shift. Engineering orgs are today looking slightly different, and I think we can expect the same in legal organizations.

Chetan Puttagunta

Two things you brought up that it’d be great if you could dive into. One is that Legora doesn’t really have a long-term roadmap. You guys react and build today. When you first got started, you had this nearly weekly cadence. That’s how long you would roadmap to. These days it feels like you almost roadmap on a daily cadence. Things change tomorrow. You wake up and it’s like, we have to do something different. Talk about that lack of roadmap.

Also the other thing that you’ve invested heavily in is just understanding model capability and the proprietary eval infrastructure you’ve built. You’ve had these conversations with the foundation model companies about how you’re able to identify latent model capabilities that they themselves are not aware of.

Max Junestrand

On roadmap, way back, every new model just unlocked new things. When we got early access to GPT 4.5, you just realized that holy shit, now it can finally draft an end-to-end thing and we don’t need all these harnesses and things around it. That’s amazing. Let’s unleash it in a way that works.

Chetan Puttagunta

By the way, to do that, you need a low-ego organization. Because you build all this IP and all this software—

Max Junestrand

And you just toss it.

Chetan Puttagunta

And you’re like, okay, now the model can do it. Delete it all.

Jack Altman

“You worked really hard for six months. We’re deleting everything.”

Chetan Puttagunta

It’s incredible.

Max Junestrand

But I think a lot of the things that we have built, we know that we’re going to delete someday.

Jack Altman

I guess you need people to opt into that at the front end for that culture to really work.

Max Junestrand

We’ve also talked about it like this. If we were here today and we started building for the future that’s way over there, that’s too far out. Our customers are not going to adopt that. They don’t understand it yet. So we need to take them on the journey. We need to take them on the path of being successful.

Every iteration cycle now is shorter. Back in 2023, 2024, I think it was slightly longer. You’d have a quarter or two quarters because the models weren’t moving that fast. Every upgrade was pretty incremental. But now it flipped. Opus 4.6 flipped in capabilities. So now we have to revisit a lot of the things that we built.

Jack Altman

Do you know what the next flip you’re waiting for is? Is there a thing?

Max Junestrand

It was funny, I was at the customer advisory board at Anthropic yesterday. I’m wearing my Dario shirt here.

Jack Altman

You look like Dario.

Max Junestrand

Thank you. Most of that conversation was about how the models are now intelligent enough where they’re no longer the bottleneck. The bottleneck is all of the software around putting the models in an environment where they can execute and do work, and humans can review that work in a trustworthy way. They’re seeing that across basically every single vertical and every single company.

I don’t really think that we’re waiting for new model capabilities anymore. There’s nice things to have. It’s nice to have better context windows, it allows us to do less garbage and context management. When you overflow the context in memory and so on, you have to deal with it to refresh it. So there’s nice-to-haves, but we’re at a point now where we just have so much building in front of us in terms of bringing the model capabilities into our world. That’s where all of our focus is.

On discovering what the models can do, we thought very early on that evals were going to be important, both building up an exercise of building new evals, but also building out evals for all the use cases that we want to cover. Because in the beginning it was a lot of, “how good is Sonnet? How good is Gemini? How good is GPT?” We had to test them on the different evals. A lot of our customers actually contributed to this. They would give us manual tasks that they used to do, and they’d tell us, “Here’s the evals, and we’re going to call you when we can get to 100% on these evals.”

I actually remember. It was a funds-related use case, an LPA key-term review report that a Danish law firm was spending three days on. Basically an associate would spend three days putting together that report. In summer of 2024, we had 60% accuracy on that task. By the end of that summer, we had 100% accuracy. Once you get to 100% accuracy, that task is done, it’s over.

I’ve adopted this mentality internally that if AI can do something, it will do it. With our product, we think a lot about solving legal tasks end to end. Once a task is conquered, it’s done. We just strike it out and we’re on this path of solving more and more complex tasks. You start with NDAs, but at some point you get to full-on share purchase agreements, which are very complex. But we’re going to get there.

The question for these organizations who are maybe more traditional and trying to keep up with the pace of AI is, how do you do that while at the same time doing your normal job? A lot of the organizations that we work with really struggle with keeping up with the technology uplift, even with our developments. We’re struggling by getting all the latest models and turning that into product, and they have to adopt it, and then their customers have to adopt it.

Winning Pilots and Global Expansion

Jack Altman

Here’s a question for both of you. As I’m listening to you talk, I can sort of see the hill climb that you’re on. You’ve attacked one part of it and the next one’s coming and the next one’s coming. One of the things I’m thinking about is, for a new startup in legal, what would the right strategy be for them? How do you possibly get into the mix fast enough for all of these things and then—

Max Junestrand

Exit to Legora.

Jack Altman

Sell to Legora, that’s a good one. How urgent is it to grow really big, really fast for Legora, given all of the dynamics around this? Chetan, I’m curious how you think about this. Is it the same urgency as always, or do any of these dynamics mean that getting to real scale is more urgent here than other places?

Chetan Puttagunta

We can go back to launch day, October 2024. When they launched, roughly the ARR of the business rounded to a million dollars. If you go back into that moment, there was this exercise of, should we make a budget? What we all decided around the table was there was no reason to make a budget because we don’t know anything about the market. We don’t know if people even like our product. We had instincts, but we just needed to go literally as fast as we could to get the product in as many hands as we could. Because ultimately the whole theory of the company didn’t work until we got product feedback. That was literally the aim. Get this out as quickly as possible into as many hands as possible.

One of the things that Max did… It’s cliche to say it’s first-principles thinking, but it is, because the team was unbiased by how to build a software company. One of the things you learned in SaaS was the way you do pilots is you would go in, do a time-trial pilot where you would give them access to the application. The minute the trial was done, you would turn it off and then they would have to make a purchasing decision. A big thing that happened with Legora is they would go put Legora into your organization and whatever you put into Legora, they would leave behind even if you didn’t want it.

So there was this idea that, “Hey, you adopted AI, you did stuff with AI, you built some practices. Whatever skills you built or whatever IP you built, it’s kind of yours. We can leave that behind. It’s not a big deal. It’s your skills, it’s the things that you’ve learned.” Then Max went around and just gave people 30-day pilots, 60-day pilots, whatever they wanted. 90-day pilots.

Max Junestrand

They would run these competitive pilots. They would say, “Okay, there’s a couple of companies on the market. We’re going to want to A/B test all of them because it’s really hard to pick based on the feature set on your website.

In those pilots, I think we did an extraordinarily good job of delivering value. When the 30 days were up, if we shut it down, it would be a riot. People would roar and they’d be like, “We’ve never seen software adoption like this in a legal organization. We need this and we need it now.”

In those pilots, we would demonstrate much better than any other company the value that the product and the service around the product could bring. We hired all these lawyers, who are now called legal engineers. It’s a great term, forward-deployed legal engineers.

Jack Altman

I was just going to say, what about FDLE?

Max Junestrand

That’s right, FDLE. They’re amazing. They’re the most tech-savvy lawyers in different organizations who don’t want to make partner, because that’s one type of life. They want to work in a tech company and now they get to work with their practice that they’re amazing at, and technology. Then they get to work with the best legal organizations in the world and drive that change.

Jack Altman

I would think once you’re embedded in these organizations, it’s got to be sticky.

Max Junestrand

I think Legora is very sticky. We’ve ripped out our competition at many organizations at this point.

Jack Altman

What creates stickiness?

Max Junestrand

The stickiness is the use cases and the cadence. If you’ve invested time in building up a workflow that works for you, why would you want to switch? It’s usage stickiness.

Jack Altman

It’s not data.

Max Junestrand

No, not yet. Not any real technical implementation, which is great, because our competition has been deployed in a lot of places with no real usage or very simple use cases. That means that we can go there, show them, and display clearly in a pilot that we deliver much better, and then we can easily swap it. So we actually have a dedicated migration team moving deployments over to Legora.

Chetan Puttagunta

This is where we often talked about not only product engineering velocity—which came naturally to the founders here because they were engineers—but also this idea of velocity of customer interaction. If a customer wanted to buy a certain way, wanted to do a pilot, whatever, just don’t add friction. That was actually the key unlock. There was this idea of, let’s just go get this in everybody’s hands and not have any bias.

One of my favorite stories about Max is that he came to San Francisco to sell a bunch of clients and then he texted me and was like, “Are you free for dinner?” So we met for dinner and then he asked for a ride to the airport. I casually asked, “Where are you going?” expecting him to say Seattle or LA or something. He was like, “I’m going to New Delhi.” I was like, “Why are you going to New Delhi?” He was like, “Well, one of the largest firms in India wants to buy. So I figured I’d go give it to them.”

Jack Altman

That’s crazy.

Chetan Puttagunta

You know this. In SaaS it was like, “No, do the West regional, then do the East regional, then do Western Europe, and then eventually hire an APAC head.” It was this whole thing.

Jack Altman

And by the way, there’s going to be a year of engineering work to be even ready to serve India.

Chetan Puttagunta

100%. And because this company and this team had never built a pre-AI software company, they didn’t know they weren’t supposed to go sell in India early, one quarter into selling the product. So Max got on a flight, went to India, and a customer in India bought. It was one of those things where because they didn’t have the patterns, they were able to get big globally in parallel.

Jack Altman

I also wonder about this. We talked about this a little bit. Being a Europe-based company means that you are multinational from the beginning.

Max Junestrand

You have to be.

Jack Altman

I think some of this is pre-AI, a lot of it is. But I also think there’s a thing where if you started in Europe, you’ve already learned how to sell to ten countries. You know that there’s differences in the way the cultures work and the way they purchase software and what the rules and regulations are. I’m curious if you thought about that when you invested, that actually, maybe coming to the US will be easier one day. And I’m curious about your experience on that.

Max Junestrand

Y Combinator weren’t particularly excited about backing a company in Sweden. I remember the first interview with Gustaf—he’s a Swedish partner at YC—and he goes, “So you’re going to move to the States, right?” And I go, “Yes, of course.” That’s the cue to say yes so that you get the invite to go to YC.

Jack Altman

Now I’m going to Sweden. “You guys are opening in Sweden, YC, right?”

Max Junestrand

I came to YC and I left three days later because I had so much business going on in Sweden and I couldn’t do work between 1:00 AM and 10:00 AM. That was just impossible. But the Swedish legal market is smaller than Kirkland & Ellis. So of course you have to expand. Naturally we went to Finland and then we went to Denmark. Then I was like, I think we got the hang of it. The most important thing was that the first customer we got, Mannheimer Swartling—the big firm in Sweden—their managing partner has such a good relationship with the other firms in other non-competitive countries that he would just introduce me. I would fly down and say the same thing I told him: “AI is going to change the world, you’re going to need a partner, I’m here, let’s work.”

That sort of made it all start. But then the move to the UK and the US was when we really started ripping.

Jack Altman

How different was coming to the US versus going to Finland?

Max Junestrand

I had a rule. There’s actually a few Swedish companies that tried to go to the US but did so unsuccessfully. Like Klarna, they tried many times before they actually made it work. My rule was, if we can serve two of the biggest clients in the US from Stockholm, then we’re ready, and then we’ll open an office here.

So Cleary Gottlieb—amazing Wall Street firm—and Goodwin Procter, we served them both. We won their business in competitive pilots, and we could serve them from Sweden. We did a lot of flights back and forth. But after they signed, we said, “Okay, amazing. Now we’re ready. Let’s open an office here.”

Starting in Europe

Chetan Puttagunta

One thing about the market structure of legal, that we knew about at Benchmark ahead of investing, is that legal has this unique market feature. It’s a services industry. In services industries technology adoption is slow at first and then rapid later.

If you look at any marketplace idea in a services area, the marketplaces are usually supply constrained, and then the minute supply unlocks, all of the supply comes online into the market and you become demand constrained. If you study marketplaces, especially marketplaces around services, this is something you fundamentally learn. It’s one of the rules of marketplaces.

In legal, the market structure is such that the initial adoption will be very slow and hard, but once it unlocks, it really unlocks. There’s some exponential viral coefficient that happens there. That’s one part about the legal industry that’s really interesting. How it overlays into software in legal is that if you look at the most successful legal software companies, they were all started in Europe, pre-AI too, by the way.

I had a hypothesis that part of the reason why you get that way is that you’re used to selling multi-geography and multi-rule systems from day zero. For example, Legora sold to a Swedish firm, a Spanish firm, and a Finnish firm. Yes, there are laws at the European Union level.

Jack Altman

But from the beginning, this needs to work for many people.

Chetan Puttagunta

That’s right. If you start in the US, what you end up designing is… There’s the federal legal system, there’s a state legal system, and then there’s regional. But it’s not as bifurcated as literally different countries.

Max Junestrand

And different languages.

Chetan Puttagunta

And different languages. So you build all this stuff on day zero that you don’t if you start in San Francisco. One of the interesting things that Max showed us in the prototype in the first meeting is that he had multi-language support already built and he had multi-legal-framework support already built.

Max Junestrand

I remember. I demoed Sweden and Spain.

Chetan Puttagunta

That’s right. That was remarkably impressive because it was a company with five people thinking on a global scale, because they were forced to. They couldn’t just serve the Stockholm legal market. Those two things meant that from the moment they launched the product and got a bunch of people to sign, immediately it was like, “Let’s go get the two big firms in every geography. Because we have to.”

Jack Altman

And it was global from day one.

Stockholm Culture and “Blodsmak”

Max Junestrand

Now, I think Legora has become a technology hub in Europe. People from Germany, from the Netherlands, from Spain, from Italy, they’re all moving to Stockholm, even in the winter, to come work with us.

Chetan Puttagunta

Talk about the culture part of it, which I think stands out a lot. It’s hard to describe to people what it’s like to visit the Legora office.

Jack Altman

When you came back from a Legora visit recently, you were like, “Oh my God, they are so good. Something’s going on there that I haven’t seen before.” It sounded different. I don’t know if it’s Legora-specific or if it’s something that happens in Sweden that can’t happen in America, but you were affected by it.

Chetan Puttagunta

It’s true. Initially, even in the group of five or ten or fifteen, however big the company was in September of 2024, there was a common thread amongst everybody. They were deeply technical, deeply intense, and had a desire to win. And they were thinking globally from day zero.

Because they were in Stockholm, they also decided to recruit all over Europe from day zero to bring people to the Stockholm office. What ended up happening is that you ended up becoming a magnet for anybody that wants to build at the forefront of AI with a level of intensity and determination, this idea of wanting to win.

Jack Altman

So what did it feel like to you on your recent trip? There’s a few hundred people there. What did that feel like?

Chetan Puttagunta

The level of engagement and buy-in to the company mission was truly unique. I think the company has done a great job with this idea of building for the company. I really do think building an AI company is a real test in ego. You literally can’t have an ego because you have to have this idea that AI is just going to do this.

Jack Altman

AI is going to be better than us at everything at some point.

Chetan Puttagunta

It’s just going to do this. The foundation model will do this capability. I’m puzzling through this and it’s really hard, and it’s an amazing feature. We have these high bars of quality and polish. So we’re going to ship fast, work really hard, build this amazing feature… and it’s going to disappear within twelve weeks. That requires an extreme amount of buy-in and an extreme amount of humility, that we’re just riding this massive wave and we don’t know where it’s taking us, but every day we solve today’s problems. We don’t worry about tomorrow because it’s a different world.

There’s a different type of energy, buy-in, and cadence that comes with that culture. It’s really interesting. The disadvantage of Stockholm has now become Legora’s advantage of being in Stockholm. Their talent population that they get to hire from is not just in Stockholm. It’s all over Europe and now it’s all over the world. Anybody that has that attitude is welcome to come join in Stockholm.

Max Junestrand

Our competition has remote days, three days in office, everybody leaves at six. From very early on… We serve dinner at eight, every day. A lot of people in our region are sort of tired of all these big American winners. We know that we have the talent and the grit and the prerequisites to build a generational company. Yeah, we had to go to the US to raise money because we want to work with the best VCs in the world. But there is a level of, we can also do it. We have Spotify just down the street.

Jack Altman

How are you going to get this level of fervor in the US?

Max Junestrand

I think we have. I think we have a very unique culture in our New York office.

Jack Altman

Is it different?

Max Junestrand

Very different. Well, it’s not different from Stockholm. We seeded it with the culture carriers from Sweden who came to New York, and I spent—

Chetan Puttagunta

I think tactically this was a really cool thing they did. You should talk about how you make everybody interview in Stockholm and then they have to onboard in Stockholm.

Jack Altman

Oh wow. So you live in New York, you’re going to join the New York office, and you’re going to Stockholm?

Max Junestrand

Onboarding in Stockholm. People who join in Sydney have to go on a 24-hour flight to onboard in Stockholm.

Chetan Puttagunta

You can’t onboard anywhere else but Stockholm. When they first opened the first international office, New York, and actually London too, people that were based in Stockholm moved to set a cadence. It’s all going to be the same as Stockholm.

Max Junestrand

The Germans who joined Legora have to move to Stockholm and work there for a year, and then they can move back to open the German office. You have to get it right.

Chetan Puttagunta

It’s a fascinating thing. I’ve been part of many companies that have many offices, and every office tends to take its own character. I remember the founders of Legora saying, “We want every office to feel the same,” which was itself a different way of thinking.

Every time Max has had me visit the company, I visit during dinner time, which is 8:00 PM. That’s when they have guests, 8:00 PM. That’s been the case in every office. That’s another thing that happened at this company. It’s interesting to me that it continues to scale. You can continue to onboard in Stockholm because every one of the 400 people that joined before you onboarded in Stockholm. So you should too.

Max Junestrand

The only reason we have that rule was because I did an internship at McKinsey and we’d have dinner at eight. So I was like, I guess that’s how you do this.

Jack Altman

Doing the US office in New York, obviously it’s not some outsider city. But from a tech perspective, there’s a lot of people in New York who want to work at a great tech company. There’s obviously been more there than in Stockholm, but it’s still different from San Francisco. I think you could probably bring some of that cultural thing there as a result.

Max Junestrand

Now we just opened in Houston and we’re opening in Chicago, all the big legal hubs.

Is this correct? Did you do a reference with Daniel Ek?

Chetan Puttagunta

Yes.

Max Junestrand

I think I heard this from you. You asked him about the culture at Legora and I think he said something like, “They’re pretty intense.”

We were very upfront with that, even in interviews. Not intense to the point where it’s not fun, but being number two in this space is not an outcome worth fighting for. Then we might as well go do something else. We’re only going to play here to win.

Jack Altman

You think number one and number two will just be vastly different outcomes?

Max Junestrand

Oh yeah, completely. It doesn’t actually matter if that’s the case or not—

Jack Altman

It gives you the right mindset.

Max Junestrand

Yeah. I think everybody’s dialed into that. I remember doing this interview in Swedish and there’s a saying: blodsmak. You taste the blood because you’ve worked so hard. I basically told her in Swedish that, “Yeah, sometimes I wake up and…” It’s a Swedish thing. I’m so tired… Then she publishes the article in English and the saying doesn’t make any sense in English.

Jack Altman

“Max is bloodthirsty.”

Max Junestrand

So it’s like, “At Legora we wake up with a metallic taste of blood in our mouths.” People in the company go, “Holy shit, is Max a vampire or does he just floss badly?”

Jack Altman

How do you feel about that now?

Max Junestrand

Now it’s become this thing. The Americans are #blodsmak. Everybody’s in on it. It’s amazing.

Jack Altman

I can feel the energy of it. It’s not a culture that I think would quite work in San Francisco. I don’t know if that’s something that you can do uniquely…

Max Junestrand

Well, when we open our San Francisco office, they’re going to taste the blodsmak.

Jack Altman

I love it.

The Series D

Jack Altman

My last question. You just raised a big round, which is awesome. Congrats. What does this mean for the future? What’s coming?

Max Junestrand

Maybe first off, just to give you a bit of insight into the round. Every round at Legora since Chetan has been a preempted round. I don’t think I’ve ever actually gone out to fundraise since the seed round. It’s been very pleasant.

We actually also have a history of taking the lowest term sheets. So this is funny. We were negotiating the number of shares that Chetan was going to buy, on Excel, in front of us. He goes, “I’ve never ever bought a company where I didn’t get 20%.” And I go, “Well, I’m never going to dilute more than 17.5%.”

We sort of look at each other and go, I guess we’re in a bit of a stalemate. It was like the immovable object meets the unstoppable force. So we put it on Excel. We write down the exact number of shares, and we start going decimal by decimal until we’re both—

Jack Altman

Wow. That is so legal coded. Just the nerdy Excel.

Max Junestrand

It was wild. So you end up investing like 19.521%. We’re both equally unhappy, or happy. I think we’re both happy.

Chetan Puttagunta

Of course.

Max Junestrand

But the Series D has been really great because it’s the first time I’ve done it together with someone else. David, our CFO who just joined from Vanta, he’s an absolute monster. It was funny. We had our company-wide kickoff and you get to pick the song you want to walk out to. He goes, “Max, I want ‘Monster’ by Kanye West.” And I go, “Okay dude.” The lights drop and I’m like, “I have a big surprise for you everyone. David is joining us, our CFO.” The speakers just explode with this. I don’t know if you’ve heard this song. He comes up on stage with so much energy. In the references, people refer to him as the CF-Go. I was like, that’s amazing.

So he and I did the round. It was super fun. It was the first time we went out to actually do a fundraise. We had a deck this time. It was wildly oversubscribed. I think we ended up having $1.5 billion in demand for the round.

Jack Altman

That’s a lot.

Max Junestrand

It was crazy. But we’re super thrilled about Accel coming in and leading it. Some great participation from Menlo and Bain.

Jack Altman

It’s awesome. It’s a huge testament to what you’ve done. It’s super exciting. I think you’re just getting started. Max, thank you for doing this. Chetan, thank you as well. Really enjoyed it.

Max Junestrand

Thank you so much, Jack.

In this episode, the team behind Y Combinator reflects on what has — and hasn’t — changed since the early days of YC, and how AI is reshaping what it means to be a founder. They discuss how they evaluate builders now, why execution still matters more than competition, and what YC is prioritizing as the startup landscape evolves. At its core, the mission remains the same: increase the number of great startups in the world.

Garry Tan is president and CEO of Y Combinator and a group partner. He was a partner at Y Combinator from 2011 to 2015, where he built key parts of the YC experience for founders including Bookface and the Demo Day website. Garry is the co-founder of Initialized Capital and Posterous (YC S08), a blog platform acquired by Twitter, and prior to that, he was an early designer and engineering manager at Palantir.

Harj Taggar is a Managing Partner at YC. Of the 1,000+ companies Harj has advised while at YC, 5 have gone public. He was previously founder and CEO of Triplebyte (YC S15) and Auctomatic (YC W07), which was acquired by Live Current Media in 2008. He first joined YC as a partner in 2010, leaving in 2014 to start Triplebyte and rejoining in 2020.

Jared Friedman is a Managing Partner at YC. Jared has advised more than 20 YC unicorns while at YC. He was co-founder of Scribd, which was funded by Y Combinator in 2006 and grew to be one of the top 100 sites on the web. Jared previously worked at a pioneering AI company.

Timestamps:
(0:00) Intro
(0:18) The YC product
(5:05) AI and the new builder
(13:01) Pivots and upcoming trends
(22:26) Making something people want
(24:50) What’s in store for SaaS
(33:02) Capital in the age of AI
(36:28) The human capacity for desire
(42:18) Building in America
(44:29) Fixing San Francisco
(47:58) Scaling YC

Links:
https://x.com/snowmaker
https://x.com/harjtaggar
https://x.com/garrytan
https://x.com/jaltma

Watch on YouTube; listen on Apple Podcasts or Spotify

Subscribe now

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

The YC Product

Jack Altman

I’m really excited to be here with you. Thanks for all doing this with me. To start, when did you all first go through YC as founders?

Jared Friedman

I think I did it first. Summer 2006, so the third batch ever.

Harj Taggar

I did winter 2007, six months later.

Garry Tan

Summer ‘08.

Jack Altman

So a long time, pretty close to the beginning. Where I want to start is, you all have seen in many incarnations what YC has been like as founders, as partners. You’ve worked outside of YC and inside of it. What has changed? Maybe the lens I want to ask this question through is: what was the value proposition to founders in 2006 versus 2016 versus 2026? What has changed and what has stayed the same?

Garry Tan

Yeah, what was it like in ‘06?

Jared Friedman

The most surprising thing to people from the outside is actually how little it’s changed. I think that’s by design. The thing that Paul Graham created that we all did in the early 2000s was great. It was a great product. As you know, when you have a great product, don’t fuck with it. There are some things that had to change, but in broad strokes it’s much more the same than it is different.

Jack Altman

How would you capture the essence of that product? To a founder, if you had to boil it down to two or three things, what is that product about?

Jared Friedman

We recently worked on a redesign of the Y Combinator website. Actually, Garry and I did. We actually tried to write it down possibly for the first time. Do you want to explain this since it’s really your words on the website?

Garry Tan

It was a team effort. Honestly, we tried to return to what the founder’s experience is. We found all of these old photos. Actually, your brother is the first one on there, and it’s him with the double popped collar.

Jack Altman

We’ll pop that up on the screen.

Garry Tan

Then you start flipping through and it’s Patrick and John Collison. It’s Brian and Joe and Nate at Airbnb. You see them so young, and then you see them ring the bell. Basically what we’re trying to create is like Disneyland for transformation: from startup founders who are just starting out to literally the people who make the companies that really matter. It’s actually a social process. All reality is socially constructed.

I remember when I found YC and came to my first Startup School. It was like being a fish out of water and then jumping into water. I was surrounded by people who were builders, who were earnest. When you get into YC, we take people who are earnest and technical and at the end of that process, hopefully they become formidable.

When you go to the homepage, that’s what it’s about. YC is a transformative process. It’s like Hoffman or something. It’s not that New Age-y. It’s actually very chill. I don’t know how you would describe it.

Jared Friedman

I’m a Harry Potter fan, so I prefer to think of it like Hogwarts.

Jack Altman

When I did YC in Winter ‘16, starting a company felt like such a weird, odd experience. In some ways, having this group that normalizes what it’s about — where you’re surrounded by other people who talk about the new language and the new set of things you should be thinking about — it almost calibrates the strange dream that you’re in. That was a big part. There’s also always been the stamp of approval, which is hard to underweight.

I’m curious how you guys think about that with outsiders in particular.  One of the things that seems different to me at least is that now more than 10 years ago, and I’m sure more than 20 years ago, the ecosystem is an understood thing. Founders can read a lot of stuff online. People can read a lot about them online. There’s more known in general. But I still feel like there’s this thing YC can do, which is take people who maybe aren’t yet in that vortex, identify talent somehow, and bring them into that vortex. I’m curious if you guys spend active cycles thinking about that?

Garry Tan

All the time. I’m in the middle of my very intense addiction to Claude Code and Codex. Actually using this stuff is pretty wild. I basically recreated my 2008 startup, 70,000 lines of code, in about 90 hours over two weeks, while having a full-time job and trying to raise kids. It just really compressed a lot of my sleep. But at the end of it, I have a codebase that is better than what it took five engineers, and me taking anti-narcoleptics, to build for my YC startup.

Jack Altman

It’s crazy.

AI and the New Builder

Garry Tan

Something happened at the end of November when Opus 4.5 came out. I heard about it and I was like, “Hey, what’s going on?” The most interesting thing for us is that we’d been talking about it for years, been using it for years, and then it wasn’t really until December where it was like, “AGI is here guys, for code.” I feel like I could create in 80 hours something that I could not create with $5 million and five engineers in two years.

Jack Altman

Let’s stick with that, this coding topic. First, what are you trying to identify as greatness? If before this moment you needed to find great engineers, what is the thing you’re looking for now? How has that changed? Second, the startup advice has always been “write code, talk to users.” What is that now?

Garry Tan

Prompt and talk to users.

Jack Altman

But there’s a lot less time prompting.

Garry Tan

This literally just happened and all of us have been collectively doing it. Harj did a project, Jared‘s coding all the time. Our whole team is using this stuff. We realized, “Hey, why don’t we actually put it in the application process?” For the first time, for the spring batch, you can upload a transcript of your Codex or Claude Code making a feature. We’re starting to figure out how to process it. We put it in a security sandbox because we figure it’ll be prompt-injected very quickly.

You can tell a lot about whether someone can build just from how they prompt the agents. Do they know systems? For YC, you get a t-shirt that says “Make Something People Want” on day one. If you look at a résumé, you can sort of guess at whether they can make something, but you can’t really tell whether they can make something people want. You can look at their GitHub and maybe see if they can make something. The only way you can really tell if they can make something people want is if they did it already.

Jack Altman

And there’s not exactly a GitHub for prompting, if that’s what you’re asking people for.

Garry Tan

But you can tell… Do they use plan mode? Do they think about systems? Are they prematurely optimizing? Are they over-engineering? Basically, what is a feature to them? What is the complete release? Do they think about the edge cases? How you do anything is how you do everything.

My favorite Steve Jobs quote, he talks about how if you’re a carpenter, you can tell other really great carpenters. You don’t look at the front. Everyone looks at the front and they’re like, “This seems good.” But a great carpenter, an artisan, looks at the back of the cabinet. The back of the cabinet only other carpenters are going to look at.

That was one of my favorite things. When I funded companies at Initialized, and when I was a partner at YC the first time around, that was the number one thing that I loved. Is there “game recognize game”? Would I go work for this person if I weren’t doing the thing I was doing now?

Harj Taggar

This is how you spotted Apoorva with Instacart, right?

Garry Tan

Yeah. He came in and honestly it was craft again. He’d literally built an iPhone app that was a demo app. Claude Code didn’t exist, so he actually had to build it himself. The way I could tell was that — turning the cabinet to the back — he could scroll it and it scrolled really smoothly. That wasn’t true for that era of iPhone apps. The App Store and iOS apps were brand new. I feel like you guys do this all the time.

Harj Taggar

To your question about how this changes the way we think about picking founders, I think it’s going to expand the net rather than necessarily change it. We’re all still in agreement that we absolutely want to fund genius engineers who aren’t necessarily using Claude Code. There’s going to be a Patrick Collison of every era and you want to fund those people.

The way we’ve talked about it internally is that this is probably an era where we might find more Parker Conrads. I remember the application when Parker applied with Zenefits in 2013. It was extremely well-written, but single founder, not central casting, not quite technical. He was technical enough where had a demo but didn’t have a CS degree, wasn’t the traditional YC archetype.

The only reason we interviewed him was that his previous company, SigFig, I had used it, it was a personal finance app. So he was clearly capable of doing stuff. The interview made it immediately clear that he deeply understood what he was talking about. He was super articulate, clearly a really strong product thinker.

It worked out for him because he recruited a co-founder during the batch, and then obviously Zenefits had its thing, but Rippling is obviously huge.  If Parker hadn’t got his co-founder during the batch, it would’ve been a totally different story. I suspect that the Parker Conrad of today is just in Claude Code, actually building quite sophisticated applications.

Jack Altman

It’s also interesting because Parker’s one of the most commercially intelligent people there are. Coding applications are probably increasing the advantage for people with that shape. Obviously, I’m sure the real technical breakthroughs are always going to be really important.

Garry Tan

This is markedly better than just looking at a resume. When I first came back to YC, I read all the feedback. We’re on r/ycombinator too with our anons and we know what people are saying. It was like, we should pay attention to this and frankly we need to do better than that.

Parker did go to Harvard, but we shouldn’t fund someone because they went to Harvard. We should fund someone because they actually understand the user and are unbelievably tenacious. That’s actually universal for any product, any vertical, any set of customers: the most important thing is agency and taste. Agency is: I see this person, they have this problem, and I believe I can solve it using technology. Taste is: let me actually build the first version and get it in the hands of people. Did it work? How did it break? You go all the way into the weeds.

Imagine hundreds of thousands of lines of code and you’re going through and fixing all the bugs. Think about the tireless, ceaseless gardener. Have you ever been to the Baha’i Gardens in Haifa? It is the most beautiful garden I’ve ever been to. There’s not a single weed, not a leaf out of place. I think the best products in the world, the best experiences in the world, are like that set of gardens. It’s because — it’s actually a religion — they really, really care.

Jack Altman

On that topic, a piece of advice I’ve found myself changing on a little bit over the years is that it used to feel a little bit more like you could just ship something broken fast and then iterate from there. I still think that’s a good general mindset. But I do feel like the bar for products is just so high now. The quality of a software product at Series A seems really high to me lately. How do you guys advise people as they’re getting MVPs out?

Jared Friedman

If Garry was able to ship 70,000 lines of code in a week while also running YC at the same time…

Jack Altman

And raising kids.

Jared Friedman

Then the bar for what two founders working on their idea full-time could do before they interview with YC should be a lot higher.

Harj Taggar

And we see this in the batches. A few weeks into the batch, some of the groups do what we call a product showcase now. You just get up there and give a quick demo of what you’ve built so far. Every six months over the last three years, the bar for what you should demo even a few weeks into the batch just keeps going up and up.

Pivoting, Competition, and Making Something People Want

Jack Altman

It also makes me wonder. Inside a batch, a company ought to be able to pivot more times than they used to be able to. A company ought to be able to try stuff, see if they get traction in a few weeks, and if they don’t, move on. Are you seeing that happen? I know a lot of this is new, but do you feel like that’s going to be happening? Is it happening?

Jared Friedman

Absolutely. We’re seeing companies try many things during the batch.

Jack Altman

Do you advise in that direction? I felt like historically there was a YC school of thought. I interpret it as: ship fast, iterate, see where you’re at, go from there. I’ve interpreted in contrast the Keith Rabois school of thought as: you’re a movie producer, dream your movie and then ensure it happens, and don’t let anybody say no.

Harj Taggar

I feel like the YC job is so much more, almost on the psychology therapist end of the spectrum on this stuff. At least for me, a lot of it is going off the vibe of the founder. I don’t really have a blanket view on whether you should pivot quickly and give up on this idea or stick with it for a long time.

Usually when you’re meeting with founders, you can just tell if someone’s been working on something and they just never seem excited about it, and two weeks in, they’re still not very excited about it. It’s hard to tell them, “you just need to persevere and keep going.” It’s usually better for them to find the thing they have the spark about. What do you think?

Jared Friedman

Yeah, I agree. An anti-pattern for founders who are pivoting is that they have no existing prior on what a good idea is. They’re hoping the outside world will tell them what a good idea is. So they launch five totally different things for five totally different groups of users hoping that one takes off. They usually don’t. What I’ll typically try to do is dig deeper with them to find an idea they actually care about and then see how we can turn that into a startup idea.

Jack Altman

One of the things that I’ve noticed — and a lot of people have noticed this, it’s not some big insight — is that the median startup in YC batches is a good indicator of upcoming trends. I noticed a couple of years ago, before AI was really everywhere, there was one batch where all of a sudden like half the companies were AI companies. Then the next batch. it was like 75%. And then it was basically all AI companies, except for hard tech. You’ve got hard tech too.

Garry Tan

10% hard tech.

Jack Altman

YC is the hard tech of hard tech.

What is the trend right now that you’re seeing a lot of, that you think YC might be particularly attuned to early?

Jared Friedman

I don’t think there are any strong trends yet.

Jack Altman

It’s all just AI right now.

Jared Friedman

It’s all just AI right now. Some things that are smaller trends might be glimmers of the future. Just in the current batch, prediction markets are big. Kalshi is really inspirational to a generation of people. Stablecoins and crypto stuff might be another interesting non-AI trend to talk about.

Jack Altman

Do you have a sense for why? Why are these the companies? Because I agree they have captured something. What is that, do you think? I feel like there is clearly a generation that has been really motivated and interested in this and it’s clearly taking off.

Garry Tan

Any time there’s a regulatory change… These things were in a gray area and now it’s green lights. Everyone’s going to do it. Capital flows to it. Capital is required for building consumer businesses. Boom, you’ve got a consumer business growing super fast. You get more capital, the flywheel happens, and you’ve got another DoorDash, which is great. Capital as a bludgeon works really well there. But what’s funny is it’s not clear to me that capital as a bludgeon works as well with AI companies anymore.

Jack Altman

What do you mean?

Garry Tan

You don’t need to have a thousand-person company anymore.

Jack Altman

It’s interesting. I still feel like I’m waiting for that. There are obviously some companies. I’ve backed YC companies that I’d love to invest more in, but they’re super profitable and I’m like, “Okay, that’s great, I’m very happy for you.” But there are also companies raising bigger rounds than ever and consuming crazy amounts of capital. In some ways it looks even more capital-consumptive than ever before, and I don’t feel like I have a good mental model to square exactly why that’s happening.

Harj Taggar

It certainly seems like it’s easier to get to $1-2 million of ARR without hiring anyone. We get so many investor updates. We’re used to seeing “we just hit a million ARR and we had ten people”. But now it’s more like “...and we haven’t hired anyone.” So that’s genuinely new. I agree about the step after that though. The Series B rounds seem bigger than ever.

Garry Tan

Venture is contracting a little bit, not on a dollar basis. On a dollar basis, there’s a “flight to quality”. One thing we’re talking about internally is that the world is increasingly full of these mega funds. They are friends and they do great work, but it’s more and more dollars behind fewer and fewer people.

Jack Altman

Fewer firms.

Garry Tan

Yeah, fewer firms and fewer people at those firms. The natural thing then is capital as a bludgeon. The fix is in, which is great. Often for YC, we’re sometimes the number one, number two, and number four in any given vertical SaaS space. We’re in the billion-dollar one, we’re in the half-billion-dollar one, we’re in the “arm the rebels” one that works with the partner. This happens over and over again.

Jack Altman

So do you think in this environment the king-making meme is more true because of the capital-as-a-bludgeon thing? Is it more effective in this type of environment?

Garry Tan

Basically, if the founders are good, the capital helps them get there a little faster. But I don’t believe capital as a bludgeon…

Harj Taggar

Especially when things move so quickly. You can end up having capital and then moving fast in the wrong direction.

Garry Tan

Harj funded Giga. Those guys beat — I mean we love Bret, we love Sierra — but Giga, this sort of ten-person team, beat all the incumbents for things like DoorDash. It’s back to back to back. They have the best tech and I think they’re maybe still under 20 people right now.

Jared Friedman

And Jack, speaking of insiders versus outsiders, that’s such a classic insider versus outsider story. What were the backgrounds of the Giga founders?

Harj Taggar

They were two IIT guys in India.

Jared Friedman

They were still in India when you funded them?

Harj Taggar

Yes, they were in India. They actually couldn’t make it out here for the batch for visa reasons, but they were just clearly brilliantly smart. They were the top-ranked IIT students. As undergrads they had done sort of PhD-level research in fine-tuning LLMs before everything really took off. Just clearly exceptional.

Jack Altman

On this point about king-making stuff, and not to talk our own book too much, Legora was a startup coming behind something that seemed really established, and they’re based in Europe. They went through YC and they’re doing great. So it doesn’t seem like stuff is locked up immediately.

Harj Taggar

And that’s a good example. Even if you have the capital, you might not build the right product off the bat, and then things change.

Garry Tan

The model’s getting better. Back to back to back, every single year, the models are getting better. The rumor for Harvey is that they might have spent a bunch of VC capital on fine-tuning models that turned out not to be better than the frontier models. You don’t have a crystal ball. You couldn’t have guessed that. It was just an idea that maybe it might happen. Of course it did happen. Now we’re in this situation where if you have hundreds of millions of dollars sitting in your bank account, you’re tempted to use it….

Jack Altman

The models thing is so interesting to me because one of the things that has struck me is that a lot of the source of product-market fit actually exists outside the startup delivering the service. You take an amazing founder like Max, you put them in a market like legal where there’s just a lot of uptake for some set of reasons, and then you have this tailwind outside the startup that’s actually driving a lot of the aha moment. Not to take away from anything they’ve done, but this is the case for all these startups. That just changes some things.

Harj Taggar

From the founders’ perspective at least — and a reason why they’re raising the B rounds — one, there’s always just the case of banking the money while you can get it. But it also feels like the surface area for the products is bigger than ever and they are still fundamentally constrained by the number of people they have to go execute on things. It feels like in the SaaS era you build one core feature, hit product-market fit with that, and maybe just run with that for a few years and then add things.

Whereas now, even within the batch, people are trying to add more into the product and have it do more.  So they just fundamentally feel constrained by how much they feel they should be doing. Then they have competitors and the competitors are moving faster. So I haven’t yet seen the “once you hit product-market fit, you don’t need to hire as many people”. Or at least people aren’t acting on the belief yet that they don’t need to hire as many people.

Jack Altman

One thing that doesn’t seem automated yet is sales, for example. A lot of people thought it would be automated by now, but it hasn’t been. Support has, but sales hasn’t. So you still need a lot of salespeople. It seems like engineers are way more effective, but if you’ve got the capital, 50 engineers is still going to be better than five engineers. Some of these things just haven’t played out intuitively.

Harj Taggar

It’s great for everyone using the products. The bar for what you expect out of the products you use just keeps going up and up, which is awesome.

Jack Altman

There are also a lot of markets that are so genuinely blue ocean. They look like good ideas and they are good ideas and it’s totally new. The result is 50 startups doing something similar. I think that’s a good thing for end consumers. Obviously you guys have a lot of companies in that situation, like we all do.

In this competitive of a market moment, when every startup has a ton of competition, does that change anything? When you’re working with specific companies, do you find yourself saying “you need to go faster, you need to be thinking about something differently”? Does  it update anything when we’re in this type of environment?

Garry Tan

Me?

Jared Friedman

I felt like Garry was holding back.

Garry Tan

I’m hoping you guys have a good answer.

Jack Altman

I can answer my own question by the way.

Harj Taggar

I guess the reason we’re pausing on it is just again, YC is about getting things off the ground. Especially during the batch, we’re so focused on: is this even worth investing another two weeks of your time in?

Jack Altman

Is there a glimmer of product-market fit or not? And that doesn’t really have anything to do with competition.

Jared Friedman

At all. Exactly. We actually spend the vast majority of our time on competition telling founders not to worry about competition. Because imagine if the Legora founders had not launched Legora because they looked at Harvey and said, “oh, it’s over.” That’s what we see a hundred times a batch, that story. So it’s just being like, “don’t worry about it, just out-execute them.”

Garry Tan

We always just go back to “make something people want”. It says “make something people want”, it doesn’t say “do a market map, based on what Perplexity tells you…”

Jack Altman

You could say, “make a market map, then make something people want within it.”

Garry Tan

We should make an April Fools T-shirt that says that. “Make a market map, then make something people want.” It’s like, what the hell are you talking about? That’s definitely not how you do this.

Jack Altman

So let’s say somebody’s working on customer support. I’m pretty confident that market is not saturated. A good team that comes into customer support and says “I’m going to go find some more customers” could do it. So the view is just, if you can find customers and get it going, don’t even think about who else is out there, just go.

Harj Taggar

I think that’s basically it. Go out and get customers, and if you have good competition then you’ll have a hard time getting customers. If I try to launch a new payment processor, I’m going to run into Stripe. It’s going to be hard for me to grow really quickly. That ends up being a lot of the advice during the batch.

Is SaaS Dead?

Jack Altman

I’m curious how much you guys think about stuff at a macro level. I know the most important thing — which I believe is obviously correct — is to think about the micro. Get this startup off the ground and going, and then things can go from there. But I am curious about some of the macro things. One that comes to mind is the recent trend in public markets where SaaS multiples have just been totally hammered. Do you guys feel like SaaS is dead? Does that resonate for you? Do you see anything different in the companies you’re working with?

Jared Friedman

Is SaaS dead?

Jack Altman

Is SaaS dead?

Garry Tan

I think it’s dead. The thing is, if you run a SaaS company, you don’t have to be dead. All you have to do is embrace Claude Code. You have to embrace, top to bottom, an agentic view of how everything is going to work.

Put it this way. The same week that I personally realized everything was different, I funded a team from Meta Superintelligence who had left. They were pointing out that Meta has 20,000 people working on Reality Labs and Alexa has 20,000 people. I thought about my experience. I didn’t even have 20,000 people. I had five people. Why did it take two years?

Because I knew what the architecture was, I knew what I wanted to build, and then I had to farm this out. I had to have meetings, come up with a doc, and then other people have other opinions. We’d have five meetings about the architecture and argue about it. Two weeks later, maybe something happens. If you’re in a big company, it’s three months later and maybe something happens.

But we don’t have to do that now. We could just try both. Go into plan mode and then just do it. Literally an hour later, we will have something done that would have taken two weeks, or two months, or sometimes two years. If you’re not a tech company and you’re an incumbent, it’s two years or never that you would even make that decision.

The speed of making that decision, how decisive you can be… Going back to the transformation thing, that’s actually what I feel like I learned at YC. It’s not that I didn’t know how to do it. I was employee number 10 at Palantir. We were moving fast. I was sleeping at the office. The big difference was realizing that instead of getting 20 basis points of Palantir… That’s now an astronomical amount of money, by the way. We didn’t know it at the time.

Jack Altman

We’ll run some math. We’ll put the math up on screen. That’s a thumbnail. That’s perfect.

Harj Taggar

Right above Garry.

Garry Tan

Basically I wanted 97% of the company that I started. I went from a place that was already fast. Then being the founder and CEO, YC sped me up even more. Because you’re in office hours with people and it’s like, “Oh man, this person actually grew 10% this week, 20% this week. How did they do it? I need to do it.”

I think all of this is an accelerant. Claude Code and Codex, being able to make two years of product progress in about two weeks, how could that not make YC more insane? The amount of things you could try and do. You could do two years of work, realize that nobody wants it or there’s too much competition, throw it out, and do it again.

That’s not a throwaway. You learn something, you also got better at using these tools, and you get another shot. What’s funny about seed is you could think of people raising two or three million dollars. That used to be a Series A by the way, which is hilarious.

Jack Altman

Now it’s barely a seed.

Garry Tan

Yeah, it’s like “oh, that’s a small seed.” Are you serious?

Jack Altman

It’s a pre-seed.

Garry Tan

That’s so much money. This is outrageous. You don’t even need this money. It’s crazy that you can go so much faster now.

Jack Altman

I actually want to come back to fundraising advice because I feel like it’s gotten into an interesting place. But the opposite question of the “is SaaS dead” question is, what do you feel is not AI but safe from AI? Are there areas that you think are insulated from this mega-trend, that you’re happy to back without fear of that?

Harj Taggar

I think the obvious one first is just marketplaces that are aggregating people. I think Airbnb is very safe. I think there’s a bunch of marketplaces. DoorDash is totally safe. That’s a very clear one.

Garry Tan

One thing we’ve been talking about is what the agents want. What the coding agents tell you to do turns out to be itself a really big moat. GEO, making your API docs actually written to prompt inject Claude Code to force it to use you… I’m just joking, it’s not clear that you can do that. But if you could you would because it’s that powerful. People will just say “I need X” and then “what’s the best thing on the internet to do that?” I just think that’s really powerful.

Harj Taggar

The other thing you might say, going back to this SaaS thing, is even within SaaS you might say things that feel like they are essentially databases or systems of record — things like Rippling — feel like they’re going to be in a good spot. Then things where the moat was around the number of integrations built, or data connectors, or that kind of stuff — which you can now just code up in 10 or 30 minutes — that’s brittle.

Jack Altman

Do you think it’s system-of-record that makes payroll sticky, or do you think it’s touching money?

Garry Tan

Touching money. Regulatory. You have systems that are working, you don’t want to touch that unless you have a really good reason.

Jack Altman

Because one of the ones that comes up a lot right now is, are CRMs safe? I don’t have a particularly strong opinion, but it seems like an interesting question. It doesn’t exactly touch money, doesn’t exactly touch regulatory . It includes a lot of important information, but that information can now live in email or somewhere else.

Harj Taggar

I think Salesforce is probably screwed. There have been so many attempts to do the Stripe strategy. Get startups in a YC batch using your CRM, because everyone hates Salesforce. But no one could ever really grow into a big company because at some point your head of sales says, “No, I need these reports,”

Jack Altman

And to your point, you need all those integrations, badly.

Harj Taggar

Exactly. Now that’s all just going away. I suspect the next Salesforce is going to come out of a YC batch that sells to all the other YC startups. Investors will say, “Oh, it’s not going to grow because no one can compete with Salesforce.”

Jack Altman

Also, “all its customers are YC companies. It’ll never work.”

What about hardware? Is hard tech safe?

Garry Tan

Hard tech is just hard. The moat comes from it being hard to source, hard to make it work. It’s just another muscle.

Jack Altman

It’s atoms. AI hasn’t exactly come for atoms yet.

Garry Tan

Robotics is still a little ways off, but we need ASI. I think we have AGI now, and ASI is coming. Superintelligence is clearly just around the corner.

Jack Altman

Do you think when we know we’ll know? Or do you think there’ll be a thing to you that would say that a new moment is here?

Garry Tan

I think we have limited versions of ASI right now. I saw a demo—

Jack Altman

All the bots talking together? That was crazy.

Garry Tan

Yeah, that was crazy. That’s the first real example of swarm intelligence. In AI research, swarm intelligence is like this huge field. This was a massive validation of that field. It’s kind of an interesting question. All the main AI labs talk are like, “We’re just going to build the God model, just make it mega-big.” Think about Dr. Manhattan or something.

Biological systems and human society are not modeled that way. We have lots of people with lots of diverse hardware, and different opinions about all kinds of things. You come together and see what sticks. That’s what research is, for instance.

Swarm intelligence versus god-level intelligence is a very interesting thing and that’s just the beginning of that. That just happened literally last week.

Capital in the Age of AI

Jack Altman

Is there a type of project or pathway for a startup to build that you’re not currently funding that you’d like to? I’m thinking of hardware companies or projects that at the beginning I don’t think can start with $1 million. Some of these genuinely need to start with $10-20 million. Is that something you think about? Would a divergence like that ever be worth it to YC? Or is it like, “we don’t need to back every single type of company of all time?”

Harj Taggar

We would like to back every single type of company of all time if we could.

Jack Altman

That’s actually the kind of thing I was curious about. When you’re thinking about YC growing, is the conversation like “we have our style and we like to get everything within that,” or is it “no, we’d like to back every company of all time”?

Garry Tan

We’re generalists. YC funded Coinbase when crypto was like the weirdest thing. Brian Armstrong was on the risk team at Airbnb — in the anti-fraud team — and he was already in the family. He said, “How do I start a company? This is clearly the way to do it.”

What’s funny is you could start 20 other Coinbase competitors but all of them died. When you’re early, it doesn’t matter. It matters more who the person is and what they believe, and then that person goes and creates the future. Being a generalist is an incredible thing, it’s truly the best.

Jack Altman

Is there a slice of the market, or a type of founder, that you feel like you want better exposure to, something you’re actively working on?

Garry Tan

Coming back to YC, one of the things we realized is that we have a huge media presence. On the other hand, on its own, if you just watch the YouTube channel it’s like “oh, this is something in the sky. I heard it’s a 1% acceptance rate.” People think that it’s maybe not for them. What we find is that all of our best people either know someone who did YC, or they met a partner directly at an event. We actually have to be in the community. We can’t just be up in the sky, on the internet.

Jack Altman

You can’t just wait for apps to come in.

Garry Tan

Jared led this. You got us to how many college campuses last year?

Jared Friedman

Over 30 college campuses. We have a huge boots-on-the-ground effort now to go talk to undergrads everywhere. We just got back from a big trip to Europe. We’re going to India in the spring.

To go back to your point about groups of people we’d love to see more of, we have a big effort here to do what we’ve done with undergrads over the last two years — which I think has been pretty successful — and expand that to grad students and people who are more like Brian Armstrong’s age, mid- to late twenties.

Jack Altman

I will say, in a good way because they’re unbelievably impressive, YC founders are young. In recent batches it seems like they’ve trended even younger.

Jared Friedman

They have.

Jack Altman

Which makes sense. I think a big change like AI favors younger people for all sorts of reasons.

Garry Tan

For what it’s worth, I’m a late bloomer. I did YC when I was 27.

Jack Altman

I was 26.

Garry Tan

Late bloomers, high five.

Jack Altman

The old guys. But that’s the old guys for YC.

Harj Taggar

Many of the biggest YC companies were started by founders in their mid to late twenties, DoorDash and Airbnb.

Jack Altman

Oh, that’s old.

Harj Taggar

Yeah, super old. You should definitely quote me on that.

Jack Altman

“We have tons of old people in YC…”

Harj Taggar

We have 26-year-olds.

Garry Tan

We started with going back to colleges. This was kind of driven by them though. I think big tech stopped hiring and simultaneously to that, there’s a real vibe inside the batch sometimes among the young founders that this is the last time to participate in capitalism. I definitely don’t think so, but it’s a powerful idea.

Jack Altman

I think a lot of people feel that way.

Garry Tan

Why is that?

Jack Altman

I think there are a lot of people who feel like, if AI is going to stay on this trend, what are we possibly going to be better at? So I’ve got to do it while I’m still better at something.

Garry Tan

I feel like that is so shortsighted. It’s unbelievable. Ryan Petersen always talks about this. Don’t you think that human capacity for desire is virtually unlimited? We have a god-shaped hole in our heart. We’re just going to want more and more stuff. The thing is, we can do it now.

I was just thinking about that turn of phrase.  I’m sure you’ve been in business meetings or making decisions about products where it’s “whoa, let’s not boil the ocean now.” I love that turn of phrase. I’ve said it a lot. I’ve used it to justify not doing things. But in the age of intelligence, why not?

Jack Altman

You can just do things.

Garry Tan

Maybe not boil the ocean, but let’s boil a few lakes. Why not? Actually, this is the moment. When you connect that to what Ryan says, that’s what that would look like. If you’re an investment firm and you beat the market, you have 20% net IRR back to back, what does this stuff mean? Does that mean you fire all your analysts and have the AI do it, and this one person who runs the firm makes all the money? Why would you do that? Because your competitor isn’t going to do that. Your competitor is going to say, “You know what, we have AI now. I want 50% IRR.”

Jack Altman

That’s the thing I have not understood about the “we won’t need capital” argument. Why would you only want five engineers if your competitor has 50? Unless they can’t do anything productive with all the agents, it doesn’t make any sense to me.

Garry Tan

Let’s boil a few lakes first and then we can boil the ocean. I’m not serious about that, obviously there are limitations to it. But the invective against AI, this idea that society is going to fall apart, is so extreme that we need some alternative turn of phrase, other than apocalypse, for this.

Jack Altman

Totally. It’s been a weird thing watching the efforts to both manage and also impact societal understanding of what AI is. I feel there is still a lot of fear embedded. Outside of San Francisco, you go to other places in the country… I’m from St. Louis. I don’t think everybody trusts AI fully. Whether that’s right or wrong, I do think it’s important to get out of our bubble sometimes just to know where the world is at a bit more.

Garry Tan

That’s for real.

Harj Taggar

It’s interesting though. It feels different this time because clearly in our little bubble here, everyone is all pro-AI. On the other extreme, I have immigrant parents who don’t speak great English. My mom is totally into ChatGPT because now she can do all this stuff. She can send letters and reply to people in a way that’s super empowering for her.

It’s the middle, the people who are threatened by it. Is AI going to take my job? Has it really been a threat to knowledge work or white-collar people? I feel like the people who aren’t early adopters — who usually tend to get on the train immediately after the San Francisco train takes off — are now resistant to it. It’s sort of bypassed them and gone to the other end.

Garry Tan

I sympathize with that. As labor that became management and capital, I totally feel that. I think it is actually about, in the Marxist sense, where you fit in there. My argument would be that it has been way more important to become a founder — which is management that becomes capital — now than ever. It’s way more possible. That fear that workers have about what is going to happen is something that management and capital has to take responsibility for.

Jack Altman

It’s serious. I think so too. It’s very easy to be like, “In the arc of history, there’s always new technology and people find new jobs.” Well yeah, but there’s a lot of structural unemployment that happens in the middle of that, and that’s real.

Garry Tan

But that unemployment only happens in zero-sum games. It happens in a case where my company does X, makes widgets that will never change, never get better. Some of it exists in the context of no competition. One of the things we learned from hard tech companies, for instance, is that it’s impossible to get a certain block of metal. You have to get it fabricated or smelted in China. America’s lost the ability to do it. When you have a market so broken that you can’t get it inside America, how did this happen?

I would go back to capital and management and say, “this is a lack of fucking imagination. We’re not here to just shave off one or two percent every single year and increase net profit and that’s it.” We need to think way more about how to use this technology to radically change how businesses work, what products are. How much better they could be?

Jack Altman

I completely agree. I think if capital and management don’t take some responsibility there, it’s not just unemployment, there’s reduced employment. There’s the whole world getting more expensive. Home prices are going up while there might be pressure on wages because you can do more cheaply with AI. So you have inflation happening alongside wage pressure at the same time. I do think it’s a more real thing than our echo chamber wants to… Again, I’m totally for it too, but I think it’s an important thing.

Building in America

Garry Tan

That’s why we’ve been vocal about this idea of little tech. We have Luther Lowe, who used to work at Yelp, and he’s in DC full-time fighting for startups to be able to actually train AI models and enter markets.  Frankly, I know we have lots of friends at Apple and Alphabet, and we have huge respect for those companies…

Once in a while you’ll see in the press, “Oh yeah, we submitted an amicus about Apple and Alphabet”. It’s not because we hate those guys, but because we need tech to allow new startups and new entrants to come in. So to me it’s all very consistent. We need to be way more aggressive about what our products and services should be and can do, and we need markets that allow those people to actually exist, thrive, hire lots of people, and create new jobs.

A lot of people are like, “Oh, I work in tech, I don’t know how to do this.” But look, it’s actually abundance. We actually have to build again. We’ve become a litigious culture. I’m sure you’ve read this book Breakneck about China versus the US.

Jack Altman

No but I want to.

It’s Dan Wang’s book. It’s incredible.

Jared Friedman

It’s really good.

Garry Tan

We built a lot in the forties and fifties, and then sometime around the sixties and seventies, they literally stopped building. We can’t build high-speed rail. It’s insane. Why? Because we’re a totally litigious culture that cannot get out of its own way.

Jack Altman

I saw some Peter Thiel talk about how we built all this stuff through the seventies and then for 50 years nothing happened except computers. Even right now most of the revolution is in computers, which is great. It’s better than nothing.  Obviously other stuff is happening too. But you look at what China does, standing up a city in no time. They’re really good at robotics. What are we doing?

On this societal topic, obviously you guys are very engaged with the city and state.

Harj Taggar

Some more than others.

Jack Altman

Some more than others. What do you think is the posture that San Francisco and California need to take? What’s the most important thing posturally that we need to be taking?

Jared Friedman

This is Garry’s area. How do we fix California politics? Garry has a plan. I’m kidding but actually he does have.

Garry Tan

Matt Mahan just announced his race for governor. I think he is the perfect example of someone who is not virtue signaling. He built more than 1,400 homes in San Jose. The year before that, he hadn’t passed all the legislation he wanted, so zero market-rate housing was built in San Jose in 2024. When he came into office, he reduced homelessness by 20%. More than a thousand people came inside and got treatment and recovery because he actually supports treatment and recovery.

I didn’t want to be involved in politics. But when I saw that my Asian American grandpas and grandmas couldn’t walk down the street without being assaulted and killed… When I saw people like me when I was 16 or 18… I knew I wanted to participate in tech. I knew I wanted to be an engineer. I didn’t know that I would get into Stanford.

I wouldn’t have been able to do that if I didn’t have algebra in middle school, public middle school. My kids go to private school, but I went to public school. We should have a government that doesn’t require you to be rich to become a startup founder or be good at math. How did we get this bad?

Jack Altman

I’m glad you’re fighting for it. It’s very important and it’s not pleasant. I see you fighting on Twitter in a way I would not have the stomach for, and I’m glad you’re doing it.

Garry Tan

I appreciate it. For people watching, look I’m not going to get every take right. I want to hear when I don’t get it right. But on the flip side, let’s have the debate. Let’s actually talk about it.

Jack Altman

It takes a lot of courage to say stuff that you think and you might be wrong about, and you might get big blowback on. Even if you have it right, people are going to get mad.

Garry Tan

San Francisco and California got this bad because people who run businesses, who have jobs, who are trying to raise families, it was all so big and so scary that we stopped paying attention. San Francisco is on a better path because we started talking about it. At dinners, we started talking about it. “Hey, did you hear about so and so? They got assaulted? Did the police actually show up? What happened with the judge?”

We’re going to try to unseat some judges in San Francisco. I was looking at the records. I’ve looked at a hundred cases for this judge, and in 90% of the cases this judge just dropped it on the floor, at an extreme rate. I think it was a three or four times higher rate of just dropping cases on the floor, purely for ideology. It’s unbelievable. How is this person serving the people? They’re not.

The thing is, there’s a reason why we elect these people. There is an election coming, and we have to make sure we hold these leaders to account.

Jack Altman

Totally. It’s great and it’s super important. It’s not easy work. Someone’s got to do it and I’m glad you’re doing it. Okay, politics tangent aside, although I could talk about that the whole day.

Garry Tan

I know, right? We’ll do the politics episode later.

Jack Altman

Going to get you and some politicians on here.

Scaling YC

Jack Altman

One thing I’m curious about — which has been an obvious topic for me on other episodes — is the mega influx of capital into venture. Is that positive or negative for you? In what ways do you experience it as both?

Jared Friedman

I think it’s mostly positive for us. YC at its best is not competing with other venture firms for deals. YC at its best is convincing people who didn’t seriously think about starting a startup to go for it, and then being their first believer. YC only works if there’s a large pool of downstream capital that can then fund all the subsequent rounds for those companies. So I think actually YC does best in those environments.

Garry Tan

We’re a managed marketplace, so we need as many great investors as possible. Actually what’s funny is that in that managed marketplace, if the supply of capital goes up, we need to go out and find the best possible people. We’re actually really good partners to the rest of the industry. VC can 2x, 5x, or 10x over the next ten years. We will meet the demand.

Jack Altman

With companies?

Garry Tan

With really, the smartest people of our generation. And if that happens…

Jack Altman

So you’re saying you feel limited by the amount of capital still?

Garry Tan

How about this? Capital from VCs like you, VCs like our friends… You’ve got to do the work, show up, don’t disappear, don’t be a dick, do no harm. When I first came back to YC, one of the most interesting evolutions in how to deal with investors was that most investors are actually B or B+. You should be so lucky to have someone who does not mess with you. That’s really good.

Jack Altman

The bar is so low.

Garry Tan

Basically yeah.

Jack Altman

Just don’t damage the company.

Garry Tan

Right. If there’s someone who has a great network or can make the Keynesian beauty contest happen for you and your company and your round, obviously they’re an A investor and they’re going to catalyze something crazy for you. You should work with them. Last time we were here it was like, “yeah, if you can get Keith Rabois to invest in your startup and give you twenty million dollars, you should probably take that money. Do it.” But for everyone else, you’ve got to find people. Sometimes you’ve got to do B+ capital. It’s okay.

Jack Altman

It’s interesting. You made the point — which I agree with — that despite the total volume of dollars going up, there’s in some ways a consolidation of the number of venture firms and players. I don’t know if it’s more companies getting funded or just a lot more dollars going to a couple of breakout successes. I guess both of those help.

Garry Tan

We actively think about how we need more A and A+ investors.

Jack Altman

Humans doing the work.

Garry Tan

Exactly. And I think they’re all going to be YC alums like you. You’re great. Ilya Sukhar is incredible. Dan Levine at Accel. Yuri Sagalov now runs the seed program at GC and he’s incredible. I fully hope and expect that 80 out of the top 100 spots on the Midas list in the next 10-20 years will be all YC alums.

Jack Altman

That’s funny. You’re funding VCs, just on a 10-year delay.

Garry Tan

Liz at First Round is great, is killing it. She’s incredible. I think that’s scratching the surface. We’re going to have dozens of the most legendary investors, and they’re all going to be YC alums who deploy all the world’s capital.

Harj Taggar

Increasing the number of great startups in the world is, I would argue, just the core founding principle of YC. When I first started working at YC in 2010, it was the first thing PG said to me. I wasn’t actually clear why he even wanted to hire anyone. I was like, “This seems like it’s a nice little family business, two of you working on it, seems great.”

But his whole point was that conventional wisdom in the VC industry, which all comes out of Andy Rachleff’s research, is that there are only going to be about 10 companies per year that will go on to reach a hundred million dollars in revenue and be significant and IPO at some point. You just have to be in one of those 10 companies every year or otherwise you may as well have just stayed at home. PG was like, “I’m not a VC. I don’t want to go out and fight for those 10 companies. I’m going to—”

Garry Tan

“We’re going to make more of them.”

Harj Taggar

“Yeah. Let’s make more of them. Let’s see if we can make two of them. Why is it 10? It’s such an arbitrary number.” Clearly over the last 15 years, that’s proven to be true. Everything we do is driven by how we want that number to go up. What are the bottlenecks? Are the bottlenecks more founders? Let’s go find more founders.

Jack Altman

You went to four batches. That was great.

Harj Taggar

Yeah, that was exactly a good example of it. That was a bottleneck. You shouldn’t have to wait six months to do a YC batch.

Jack Altman

What needed to be true for you guys to go from two to four? What was hard about that?  What did you have to change, if anything? Was it just that you didn’t get as much time between to source new companies?

Harj Taggar

Maybe this is in the weeds, but one of the structural changes we made at YC since Garry came back is to decentralize it. I would argue that pre-Garry coming back, it was a lot more centralized. There was a team that sort of ran the batch, things were more top-down.

Jack Altman

Decentralizing decisions? Batch operations?

Harj Taggar

Yeah. Maybe if I start at the bottom, now each YC partner is essentially picking their own companies and then we club together to form a group that runs a batch. We’re just more nimble.

Garry Tan

Plus we have 15 people now. That’s the most partners we’ve ever had. We have 15 visiting partners right now, so it’s actually something like 30, 31 partners total.

Jack Altman

Do you feel that there’s a limit to those numbers? Do you think you could double the number of YC partners and therefore double the number of companies? If you’re imagining a world where you’re funding four times more companies than you are today, what would you need to overcome still?

Jared Friedman

A cool thing about the way YC is structured now… I think this is something that’s often misunderstood from the outside. When most people hear a YC batch is 200 companies, they imagine the batch experience is a room full of 400 founders showing up every day.

Jack Altman

It’s actually four batches of 50.

Jared Friedman

Right. It’s actually more like each partner is running their own autonomous mini-YC of about 30-ish companies. We call them pods. I had my whole pod over to my house for dinner last night. That pod is approximately the same size as YC was when Garry went through it.

Garry Tan

We basically run seven or eight simultaneous “2008 batches with PG” and we have 15 PGs now.

Jared Friedman

With that kind of structure, there’s no inherent change that has to happen if you go from 15 to 30, because it’s already fully parallelized.

Jack Altman

One of the ways I’ve perceived YC change over the last several years was that there was a period — I guess when my brother was there — where there were a bunch of new projects. I felt like you guys clearly went back to the core and did more of it. I could feel that very clearly, that “this is our thing, we’re going to refocus on that, and we’re going to make it more and bigger.”

I think that’s been super successful. You’ve clearly throughput more companies. The companies are awesome. I’m saying that as a biased person who invests in a lot of them, but it feels that way to me. Are there initiatives outside of that core that you’re interested in with this new market moment, or are you going to just do more and more of this distilled core? Or does it depend on the day?

Jared Friedman

First of all, I think that’s a good overall description of how YC has changed, especially since Garry came back: refocusing on the core. That’s been the high-level for the last three years. But yeah, we do have some big projects in the works. I’m not sure which ones we can talk about.

Garry Tan

I know. There are so many, and they’re all in the works.

Jack Altman

Just talk about them all. Come on.

Harj Taggar

It’s not like we have new initiatives that don’t feel core. I still think it all falls under the umbrella of the core thing. How do you create more great startups? Keep pushing down on that. As Jared mentioned, Fellows is just an example of something we just launched last year. What’s another bottleneck? More founders. We want to meet founders earlier, college students before they’re ready to do startups. So we started offering grants and community to exceptional college students who we feel aren’t ready to start a startup right now, but they might be in a year or two.

Jack Altman

That’s a good example of widening the base even further. Because you could almost narrow the top and say, “we’re going to put a bunch of money into growth.” Obviously you did that. But the other way to go is you could widen the base and say, “we’re going to try to have some engagement with 10,000 founders.”

Jared Friedman

That’s basically what we think about a lot. The amount of follow-on capital is not really the bottleneck right now. The bottleneck for us is really getting more great founders to want to do startups and to do YC. That’s what the bottleneck should be. If the bottleneck is anything else, something is weird about the world. That’s what the bottleneck always should be.

For a long time, YC was struggling so much to just scale the operational side. We were like a post-product-market-fit company that couldn’t keep up with demand. So instead of focusing on growth, how do we get… We were like YouTube when it was scaling 2x every month. Everyone was just trying to figure out how to keep the site up.

That was certainly the first few years of me at YC. We were just trying to figure out how to not fall over. But now that we’ve really got the operations down, we can go back to focusing on what we should be focusing on. How do we broaden the base? How do we get more great people into our ecosystem early? How do we inspire more people to start companies?

Garry Tan

One of the most fun things… I pinch myself that I get to… I had left YC and now I get to go hang out with PG and Jessica again, hang out with Brian Chesky who’s on the board. One of the directives from the board that’s awesome was: “You need to make sure that we’re having fun.” That was true back in 2011.

Harj Taggar

The laughter test.

Garry Tan

Basically that’s the directive we got this year, and it’s not a directive at all. It’s awesome. If we’re not having fun then we’re doing something wrong actually. I remember being around YC and the partners and PG and PB and Geoff. It was just very, very hilarious all the time. It was unbelievable how weird startups can be. It’d be like, “Can you believe this thing happened?” I feel like our partner lunches are that again, which is really fun.

Jack Altman

That’s so important, having a partnership where everybody trusts and enjoys each other, and respects what people think. That’s got to make the whole experience so much better.

Harj Taggar

It’s why all the partners are former YC founders. It feels a little bit more than a job for everyone. Everyone’s paying it forward. YC changed their life in some way. It just adds to the good vibes.

Jack Altman

It is obviously an iconic and very important institution. You guys are doing a great job running it. I’m sure it feels like a heavy responsibility, but I’m glad you’re having fun with it. You guys, this was really fun. Thanks for doing it. Really appreciate you making time.

Garry Tan

Thanks, Jack. So when are you going to be a YC partner?

Jack Altman

I keep checking my inbox.

Bret Taylor is the founder and CEO of Sierra, an AI agent company transforming customer service. Bret’s legendary career includes being CTO of Meta, co-CEO of Salesforce, chairman of the board at OpenAI, co-creating both Google Maps and the Like button, and founding three companies.

We unpacked the so-called “SaaS-pocalypse” and what AI agents mean for the future of enterprise software. We talked through the shift from systems of record to autonomous agents, outcome-based pricing, platform transitions, Codex and the transformation of software engineering, and who is structurally positioned to win in the next era of AI.

Timestamps:
(0:00) Intro
(0:20) The SaaS-pocalypse and systems of record
(12:34) Sierra's competitive landscape
(17:05) Outcomes-based pricing
(24:22) The rapid evolution of AI support technology
(28:21) Young founders vs. experienced founders
(34:12) Beyond support: The full customer lifecycle
(38:47) Codex and the future of software engineering
(51:49) OpenAI and advertising
(54:59) How to run a board

Links:
https://x.com/btaylor
https://x.com/jaltma

Watch on YouTube; listen on Apple Podcasts or Spotify

Subscribe now

Clips

AI’s impact on the system of record

I asked Bret a question that a lot of people are thinking about lately since he's as equipped as anyone in the world to answer:

"Does a system of record have a place in the world if nobody logs into it?"

The “Strategy Tax”

Why can a startup with 50 engineers make up ground against an incumbent with 5,000? You'd think big platforms have the data, distribution, money...why can't they build technology faster than startups can earn distribution?

Bret calls it a "strategy tax" and gives a crisp articulation of exactly why startups have the opportunity to win.

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

The SaaS-pocalypse and systems of record

Jack Altman

Bret, thanks a bunch for doing this with me. I’m super excited for it.

Bret Taylor

Thanks for having me.

Jack Altman

You’re one of the best people to ask this following question. What is your view on the SaaS-pocalypse, if we can call it that?

Bret Taylor

SaaS-mageddon.

Jack Altman

SaaS-mageddon. In public markets, all of these companies are trading way down. You go on X and everybody’s talking about how software can now be written in two seconds so there’s no moats anymore in software. It’s leading a lot of people to ask, where does durability come from?

I wanted to start with this topic because you’ve built your own companies, you’ve been the co-CEO at Salesforce, you’re now building one of the fastest growing AI startups, and you’re on the board of OpenAI. How do you see software in this moment, in February 2026?

Bret Taylor

First, I don’t think the market is necessarily reflecting an indictment of individual companies. It’s more of a broad view of these bigger questions you were saying. Every software stock is down, but I don’t think that means every software company is equally disadvantaged. It’s basically just anxiety about the future.

It’s a few things. We can talk about defensibility broadly, it’s a really interesting question. If you look at the history of enterprise software, a lot of the value has gone to the big systems of record: ERP systems, CRM systems, the core databases that Oracle famously powered in the early days of software. Then you end up with all the software-as-a-service companies: SAP, Workday, Salesforce, ServiceNow.

If you look at what a system of record is, it’s essentially a database with a bunch of workflows around it. To date, those workflows are manipulated by people clicking on buttons in a web browser, filling out forms.

Jack Altman

If you had to synthesize pre-AI, why were those businesses so good? Was it the source-of-truth thing? That there had to be some immutable thing, so the database row… Is that what it was? Was it the ecosystem of integrations? What do you attribute the success of systems of record to?

Bret Taylor

The reason why a system of record has always been the most valuable is that it’s the anchor tenant of your technology deployments. If you wanted to create a workflow for quote-to-cash or something like that, you had to integrate with your ERP system and your CRM system.

As a consequence, the companies that owned those databases could either develop that functionality as an add-on, a new SKU. Or if it was a third-party company, they would often be a part of the ecosystem, like Salesforce’s AppExchange or whatever the marketplace equivalent is for SAP.

You ended up with a lot of value in those systems, which meant switching costs were really high because that system plus all the partners that integrated with it created gravity and high switching costs. Similarly you end up accruing a lot of value either by collecting rent from your ecosystem or developing premium add-ons on top.

It became the sun in the solar system for each of the different lines of business that these systems of record were sold into. Then you’d get scale, sales capacity scale. The larger you grow, the more salespeople you have, you can reach more and more people.

Then there’s the proverb: “No one gets fired for buying IBM,” which obviously is a somewhat dated expression. But it was like, “Hey, if you’re going to put in a new ERP system, no one’s going to blame you for choosing SAP because everyone chose SAP.”

Jack Altman

If you choose something new and it doesn’t work perfectly, big trouble.

Bret Taylor

So all those things accrue. But then the question is, now that a lot of those things start getting chipped away with AI agents… First, could you just vibe code it in a weekend? Does it change build versus buy? That’s one risk. Does it change when you come up on that renewal? Are you going to make a different decision?

Secondly, I actually think the more fundamental thing is: what is the role of that system of record if AI agents are doing most of the work? Rather than people clicking around on an ERP system to onboard a vendor, if you just delegate to an AI agent to do it, all of that is invisible to you. All of a sudden it goes from being an application to a database. Similarly, if you imagine a CRM system, and rather than having people staring at it all day to manage their leads, contacts, and opportunities, you just say, “Hey, generate me some leads.”

Jack Altman

In other words, does a system of record have a place in the world if nobody logs into it?

Bret Taylor

It does, but the real question is how valuable is it? How important is it? Going back to my metaphor of a solar system, how important is that gravity versus the gravity of the agents running around it?

It’s just really interesting. If you imagine you’re running a sales team, how much do you value the database of leads versus the agent that generates the leads? In ancient history—three years ago—those are the same thing. But now you’re like, “Gosh, I actually probably care more about the lead generation. How it’s stored and tracked is maybe a more tactical part of it.”

That’s true of every system of record. I just know CRM systems pretty well. If you look at ITSM, which is what ServiceNow plays in, or ERP systems, which is Workday, SAP, Oracle, et cetera, all these questions start coming up.

What’s interesting though is I think every single one of those companies could transform and benefit from AI. I really do believe that. You saw what Microsoft did in the cloud transformation. They went from being dependent on Windows revenue to Active Directory and Azure and all those other things. But it was really awkward. Folks like you and me back in the day used to probably dismiss Microsoft. I certainly did. I didn’t foresee them becoming as powerful as they are today. But it was good leadership, good technology.

But I don’t think the market knows who is Siebel Systems and who is Microsoft in this landscape of software companies. Probably no one knows what Siebel Systems was. That was the company that Salesforce beat to become the cloud CRM.

So can you actually develop this ecosystem of agents around your platform and will it become more valuable than the platform you had? On top of it, you have the existential risk of, is the value of software just going to zero? I don’t necessarily believe that. But you look at all of that, and if you’re just an investor in public markets, you’re like, “I’m going to sit on the sidelines. I’m going to let the market play out a little bit.” I think that’s what’s going on with a lot of these.

Jack Altman

Totally. You can never know for sure who’s going to turn into the next Microsoft, but you can try to think about who has the structural ability to expand. Who’s got the right, with customers, to make the expansions? And then which products will be easier?

In the database question: is it easier for today’s databases to build agents on top? Or is it easier for a modern agent to say, “I’m going to go build a database at some point because I can do that and I’ve got the customer relationship”? How do you think about what creates the rights to expand?

Bret Taylor

I think all the incumbents have a right to win in a lot of ways. In the same way we talked about why a system of record is powerful, you could say the same logic for all the agents running on top. The dynamic that plays out though, not just with AI, is when a new technology comes out—like the web browser or the smartphone—rarely is the expertise on how to do exceptional things with that technology at the incumbents.

There’s this thing in enterprise software, a phrase called “best of breed” and “best of platform.” Best of platform means, “Hey, we’re a Microsoft shop. We just buy Microsoft stuff.” It sounds silly, but actually there’s a lot of logic to it. You get good procurement leverage, everything works together.

Jack Altman

You don’t have to deal with a ton of people.

Bret Taylor

There’s probably some benefits, all sorts of things.

What ends up happening when new technologies come out is the pendulum swings from best of platform to best of breed.

Jack Altman

It’s much easier to get a 10x experience.

Bret Taylor

A hundred percent. Also just think of pre- and post-web browser enterprise software. You’re running client-server Windows software. It’s a completely different skillset to make a web application, as you and I know. So at the time, there’s this window where best-of-breed competitors are light years ahead of the incumbents and it’s a race. Basically, can the best-of-breed upstarts get scale in time before the incumbents figure out the technology.

That’s what’s going on right now. I would argue very few of the incumbents have any credible, decent AI technology, but they will. It’s inevitable they will.

Jack Altman

You know what I don’t understand? Why is that? What’s the real reason for it? These companies have infinite resources, roughly speaking. They ought to be able to hire who they want. They ought to know what the products could look like. They ought to be able to try them.

Why is it so hard for legacy companies to catch up quickly, versus an AI startup with 50 engineers that seems to outperform the teams that are 10x bigger at a big company? Is it cultural? Is it systems?

Bret Taylor

I like the phrase “strategy tax.” I don’t remember who to attribute that to, but we could pull up ChatGPT and ask.

The idea is that in these moments of big platform shifts, what were your strengths can become weaknesses. Let’s take Siebel Systems and the birth of the web browser. They have an on-premises CRM system. When you say, “Okay, let’s compete with this cloud-native CRM system in Salesforce,” you start to say, “I don’t want to just start from scratch. We’ve got all these assets. How do we do it in a way that takes advantage of all of our assets?”

All of a sudden you’re like, “Okay, let’s not just build a great product. Let’s transition from this product to that product. What if someone wants on-premises too? That’s our strength. We should play to that strength.” You start basically making all these decisions that sound really clever because you’re playing your strengths. In practice, if the technology wave is bigger than the category, which I think the web was as an example, you end up basically chipping away at having a pure-play value proposition.

It can also happen with business models. At that time, you’d have perpetual license software. Moving to software as a service, that’s a huge change for a business to make. For your customers, it goes from being CapEx to OpEx. For you as a company, it changes to ratable revenue. Shantanu did this at Adobe. Very few companies can make that transition. You have to sell it differently. You have to compensate salespeople differently. Revenue recognition is different.

So you have the product strategy tax, you have the business model strategy tax. Even with the incentives of salespeople there’s a strategy tax because you don’t want to just have your business collapse overnight. It’s so easy for a clever Silicon Valley person to say, “Just pivot.” If you’re a public company, you have to go in front of your investors every single quarter and be like, “Yeah, hey guys, I know our revenue just went off a cliff, but trust me, it’s going to turn around next quarter.” You don’t survive that.

You compound all those things and all of a sudden you’re like, why does a 50-person company succeed? They have none of those. All of the advantages that you had all of a sudden become anchors that are holding you back from actually doing the right thing.

That’s why I always like to remind our company, Sierra, that the wave that we’re riding, of large language models and this next generation of AI, is greater than any company riding it. Don’t fight AI. It’s going to happen with or without us.

If you go back to the internet, if we were talking in 1995, we’d probably be like, “Search as a category, e-commerce as a category, digital payments… That’s definitely going to happen.” Google hadn’t been founded yet. Amazon probably had around then. PayPal, probably not founded yet. The categories are obvious. Whether or not any of those founders existed, there would be winners.

Jack Altman

And it’s the same now.

Bret Taylor

And it’s the same now. Everyone knows what’s going to happen and you’re competing for the privilege of winning. In a world where the technology is that remarkably powerful, the strengths of the incumbents start to wither in the face of the technical change. That’s why you tend to get new, great companies. The companies that are enduring tend to be created in platform shifts more than any other time.

Sierra’s competitive landscape

Jack Altman

I’m actually curious on this topic, that there are obvious things. Within AI, not to discredit your insight, but support I would count as an obvious thing, in a good way. It looks like it works and you did it early enough to get to a place at the right time. But other people did too.

In some ways you have been playing in a very blue ocean, wide fields. The incumbents are categorically different. It seems inevitable that we’re going to have agents doing support. And then on the other side, a lot of other companies see the same thing. A lot of other people have been building it.

Before getting into the specifics, I’m curious. Experientially, day to day, does your operation of the company feel competitive or wide open?

Bret Taylor

It feels competitive and it feels like a really big market. It doesn’t feel particularly demand-constrained, which is a really great feeling as a fellow entrepreneur.

Jack Altman

So you feel like there’s lots of demand and there’s a contest with each situation?

Bret Taylor

Yeah, that’s right. It feels like there’s too much capital available. Put another way, there’s obviously going to be competition in meaningful markets. It feels like there’s too many competitors that don’t necessarily have strong differentiation. I think it’s probably healthy though. There will be a culling as the market progresses. But it does feel quite competitive.

I’ll give you a quick glimpse of the past couple years. We’ve had remarkable growth at Sierra. We closed $100 million in seven quarters, $150 million in eight quarters, which has exceeded my expectations. But this past year has felt like an inflection point. The first year of our company’s history, we would often go in and explain to clients what an “agent” was. The term was novel and it was part of our marketing, explaining what an agent was.

Number two, people would be talking about, “Hey, AI is maybe non-deterministic.” They wouldn’t necessarily use that word, but that’s what they would be describing: “How can we trust this technology directly engaging with our customers or consumers? What are the risks?”

Now the conversation is, “Clearly we need this yesterday.” Over a quarter of our companies have $10 billion or more in revenue. We’re talking about big companies. We serve most of the Fortune 20, as an example. These are big companies coming in saying, “We’ve evaluated, we know what we want. We’ve heard of you, we’ve done all this evaluation. Here’s an RFP. Let’s go.”

As a consequence, because the market has matured—illustrated by the existence of things like RFPs—you end up in more competitive conversations. And then it’s a question of, why Sierra? I’m happy to talk more about that. Obviously I’d love to as an entrepreneur. I could tell you all the reasons we’re the greatest. But you end up in this world where you’re not explaining what the word “agent” is anymore. You’re saying, “Here’s why we’re the right partner for you”, which is a very different conversation.

Jack Altman

So they’re like, “Yeah, I’m bought in on an agent. So why is it Sierra?” What have you found is the most important thing that makes you win?

Bret Taylor

One thing we really did uniquely at Sierra—the reason why over a quarter of our customers have over $10 billion in revenue—is we’ve tried to serve more complex, more regulated industries. We serve most of the US healthcare insurance market, as an example. We serve US banks, Spanish banks, UK banks. These are companies that, if you know the industry, are regulated by everybody.

It’s easy to make a demo in AI. That’s why you can go on X and see a thousand demos. Demos are cheap. But making an agent industrial-grade is hard. We’ve really uniquely been able to make agents that can have complex conversations.

The other thing we do really uniquely is, in addition to having a really easy-to-use product, we help companies move faster. We went live with Cigna in two months.

Jack Altman

That’s crazy.

Bret Taylor

Which is remarkable.

Jack Altman

How big is Cigna?

Bret Taylor

It’s a Fortune 20 healthcare company. I was on stage with Sachin, who runs their AI practice, at the HLTH conference, and he was talking about this. Part of that is, how can you show up? We’re really great at AI, Cigna’s really great at healthcare. How do you bring those two together to move extremely fast? So for a lot of our clients, the reason they bring us on is, can you help us move quickly? That requires knowledge of AI, knowledge of business. I think we show up with a greater sense of maturity there.

Outcomes-based pricing

Jack Altman

You mentioned that the pricing scheme was one of the difficult things in the past era. We don’t have to belabor it but obviously, going from just buying a license to a cloud subscription… and now usage-based is the future. What are you feeling is important as you’ve created, and probably continue to iterate, on pricing? What are the important levers for agent companies?

Bret Taylor

We do something specific at Sierra that I’m an evangelist for, which is outcomes-based pricing. It turns out in our industry, the outcome is usually well-defined. In a service context, the outcome is: could the agent solve the problem? In a sales context—we do a lot of sales agents as well—could it make the sale? Your companies paid your salespeople commissions, right?

Jack Altman

Yeah.

Bret Taylor

If you can measure the outcome, you want to incentivize the outcome. The interesting thing about agents is they’re autonomous, or can be autonomous. So if the outcome is measurable and trackable, what an interesting opportunity to actually charge for that.

Look at the history of software. Let’s take advertising. We went from impression-based ads to cost-per-click ads to now, for mobile ads, you can do pay-per-install. At least that’s my understanding. Then you had enterprise software where you went from on-premises licenses to subscription-based software. Could outcome-based software be the next?

What’s so neat about that is, for a company, what an interesting and accountable business model. There are some challenges to it because you obviously put some revenue at risk. But I don’t think most advertising tech people would say CPC ads put revenue at risk. It’s the opposite. The closer you get to the outcome, the more valuable it is for the companies. They’re actually willing to invest in it.

My view is that, to the degree agents have a measurable outcome, outcome-based pricing feels like the secular business model for agents. I think it’s both disruptive and a huge step forward.

Jack Altman

Why is it better than token-based? If those are the two reasonable options now, why is an outcome better than token-based, even over the long term?

Bret Taylor

Let’s say you had an AI agent to generate leads for your sales team. What do you care about? You care about the number and quality of the leads. You really don’t care how many tokens the model uses. In fact, it’s not obvious to me that there’s a correlation between used tokens and leads generated.

In the same way, there’s no correlation in a SaaS product between their cost to serve and the quality of the product. You could have a really good engineer write it or a really bad engineer write it. What you really care about is the quality of the product. The reason why I don’t think token-based makes sense is that it’s charging for an input that is uncorrelated with the output that your clients actually care about.

I’m a huge believer in applied AI, but I actually define applied AI as: can you describe your value proposition without mentioning models? Because if you think about, “Hey, we can answer the phone and solve 80% of phone calls without human intervention, with a CSAT score of 4.8 out of five”, you don’t mention models. Models are an input to that, not an output. If you have to mention token utilization, it’s probably a tool. It’s not an application of AI. It’s just a tool around AI.

The closer you get to a business outcome, you should charge for the business outcome, which is uncorrelated with tokens. I also think it’s almost a measure of whether you’re actually an applied AI company, if you don’t have to talk about tokens.

Jack Altman

Do you think there will be markets where things get so competitive that people have to price based on cost rather than value? Or maybe the other format would be where you can’t describe the outcome cleanly. For example with coding, which we both probably think is super important, it’s a little harder to say what the outcome is there versus usage. What are the conditions where tokens do make sense?

Bret Taylor

There’s this old Apple site where they had Apple folklore. There was this one boss at Apple that made people fill out a form saying, “How many lines of code did you write?” This engineer infamously wrote a negative number because he had just refactored a bunch of stuff. It’s the good historical analogy for why tokens don’t matter. It was his way of saying, “Fuck the man. Lines of code have nothing to do with my value”, and he was doing it to piss off a middle manager to make that point.

It’s interesting because in the world of software engineering, the customers of coding agents right now are software engineers who intimately understand these models. So there’s a bit of a customer-product-market fit. So it’s a nuanced point.

But I’ll say where I see it might happen. Right now, if you’re evaluating a coding agent, you’re probably comparing it to the cost of a software engineer. If you fast forward five years, you’ll probably be comparing it to the cost of other coding agents. So I think the second-order effect as AI becomes prevalent is that the reference point for its value will change.

The thing I would say is that’s true where you’re thinking about a cost center. If you’re thinking about top-line revenue growth, that doesn’t necessarily apply. In my example of an AI agent generating leads for your sales team, depending on what you’re selling, a lead is a lead is a lead. You’ll probably value quantity and quality of leads, and there’s a math equation. That probably will remain independent of token costs, is my guess.

A large part of AI is productivity and reducing costs, and there’s a big part of it. But the other side of it is outcomes. Could you imagine a world in four or five years where there’s one coding agent that can actually produce something of greater value for your company? Will you value that? Or will you just look at the token cost? I think you’ll probably start looking for value. Will they all be the same? I don’t know.

I was just reflecting on the past year. There have been all these articles about whether AI progress has slowed down. In our world of software engineering, it’s been the opposite. Every new model comes out and you’re like, “Oh my gosh, it can write increasingly complex software.” My theory of that is that it depends on what you’re testing. If you’re using ChatGPT for trip planning, you probably haven’t seen a material change over the past year and a half because you reached sufficient intelligence for trip planning a long time ago. If you’re using AI to write Rust code, Codex is mind-blowing right now.

So one of the interesting things when I think about second and third-order effects and the progress of AI is where you pass the horizon where every model is sufficient in that task. Then there’ll be some things where the frontier continues to move. It’s hard to imagine, but we’re in a crazy time.

The rapid evolution of AI support technology

Jack Altman

Where are we at with support agents right now? Are there still edge cases, last-mile things that AI can’t do still?

Bret Taylor

I imagine a lot of the technical problems, as opposed to product problems, will become easier. But there’s still a lot of them. We at Sierra support most spoken languages in the world. If you want to support Cantonese and Tagalog, most of the good voice models don’t come from the traditional Western model companies.

One of our clients is Safelite AutoGlass, roadside assistance. It turns out that car noise, background noise, kids talking in the background, are actually all fairly hard problems to solve. Even in some of the advanced voice mode stuff, if you are in a noisy environment, it constantly thinks it’s being interrupted. So you end up having to build proprietary voice activity detection, multiple speaker detection, all these other things.

We develop all this technology because we need to be the best now and I think we are the best now. You’re like, “Okay, that’s probably going to be a commodity two years from now, one year from now.” Who knows? But you have to do it because you need to be the best at every stage of your company’s existence. The way we think about the world is we have a product called Agent Studio, Agent OS. In three years you’ll judge us by our product. Right now, our clients don’t really put it this way, but we’re judged by the technology.

If you go back to 1996, I remember when Netscape had a web server and Apache was new. No one cares how you serve webpages now. It’s a commodity. But at the time, that was what you sold. Now you have increasingly higher-order website building like Shopify. I just think the AI agent market’s going to take that progression. We’re going from a tech-centric sales cycle to a product-centric sales cycle.

Jack Altman

It’s interesting that you’re obviously having to be the best at something that you know is going to get commoditized. I don’t know if you ever had to experience something like that. For that to be true, you just have to be in the middle of an insane rate of change. But that means you have teams who are putting a lot of their life force for two years into something that everybody knows is just for two years. But it still matters nonetheless.

Bret Taylor

It’s crazy. If you look at traditional enterprise software—consumer’s a little different—you think about building up this asset, your intellectual property. There’s a fancy name for it. “Look at this platform that we’re building. It took so many years to build it. It’s got all these features. Now you’re like, “I’m building this and I’m a hundred percent certain we’ll throw it away in the next 48 months.”

Jack Altman

It’s a sand castle.

Bret Taylor

But I have to build it because if I don’t, I can’t serve the bank that has a big business in Hong Kong, or whatever it might be, where they need Cantonese support. That is the reality right now. I’ve been thinking a lot about this.

I think it was Tobi Lütke who said something provocative. When generating the code is easy, it’s almost like the system and the prompts are actually the durable asset. Put it another way: could you terraform your software from scratch? It’s the prompts that led to it. I do think that is the software of the future in a lot of ways. How do you encode the infinite number of little product decisions that you made? So much of that is encoded in code today. If you think about a product requirements document versus the code, what percentage of the emergent product is encoded in the code? Almost 90%. A lot of the little details are in there.

Software companies of the future and the products that they make are just going to take a really different shape. I’m so excited to be a part of it. I think it’s really fascinating. There’s something really interesting about AI impacting the software engineering industry almost first and most. We’re disrupting the craft of making what we’re building in real time. It’s a fascinating time.

Young founders vs. experienced founders

Jack Altman

There’s a prevailing idea in tech that AI is moving so fast that young founders have this massive advantage. I mean this with no offense, you’re not old, but you’re also not young.

Bret Taylor

You’re telling me I’m old. I get it.

Jack Altman

No, but you’re not the youngest founder and you have one of the most successful AI startups. It does seem like you’ve brought a lot of your previous experiences to what you’re doing, but I can tell from talking to you that you’re also just rethinking everything.

I’m curious about your own experience, for yourself and for other founders. Do you think by and large young founders have the advantage? What does it take for more experienced founders to have the advantage?

Bret Taylor

I’m always a big believer… I don’t know if it’s a real quote, but some venture capitalist said, “Why was this founder able to conquer this market where so many others had failed?” And they said, “He was too naive to know it couldn’t be done.”

There’s a certain element of that I love because you end up with this kind of naivete that is actually a form of principled first-principles thinking. A lot of young founders have that. You just don’t know why this messy, bad product dominates the market. You think there’s a better, faster, cheaper way to do it. You don’t have any of the hard-won lessons that can end up as oversimplified analogies keeping you from actually taking that leap. Tony made DoorDash and didn’t care about Webvan’s failure or Kozmo or whatever it was called. I can’t remember all the dot-com bubble companies.

But I do think, especially in enterprise software, the experience that some of our team members bring—including the old men, me and Clay—really does matter. Part of the reason we’re able to serve so much of the Fortune 100 is we can go into a bank or a healthcare payer or healthcare provider, or a revenue cycle management firm, or a big telecommunications company, and understand their business. We’re working with one large medical device company consolidating 40 of their call centers into one, and we can have a discussion about the change management of doing that. That’s not really a tech problem, but it does require understanding business.

We always joke at Sierra that there’s a Venn diagram. There’s a circle of people who understand the next generation of AI and a circle of people who understand business, and we’re the company right in the middle of that, and maybe the only one. That matters. You know that infamous MIT study saying all these AI projects fail? None of ours do. That’s our value proposition. We can actually help you go live. I think the experience has benefited us.

Jack Altman

I’m curious if you can point to what has created the lead you have so far. Obviously I know you’re just getting started, but at the moment you have pulled away in a big way. I’m sure there’s a lot of daily blocking and tackling. But I’m curious if there are any foundational decisions or strategic approaches that over the last couple years you look back at and think, “That was pretty essential to make this happen.”

Bret Taylor

There’s two almost independent areas of investment. They’re not independent, but they’re very different. One is the product and one is our go-to-market and partnership model. They’re both really intentionally built.

On the product side, we’ve tried to balance ease of use and extensibility. When you serve really large companies that have been around for 200 years, you need to work with mainframes, you need to work with a thousand different systems. You’ve done 10 acquisitions. Enterprises are messy. That’s why most enterprise software designed for larger companies tends to be quite extensible. Often that extensibility comes at a cost, which is: is it easy to get up and running?

As a product designer, one of the things I’ve spent a lot of time thinking about is: we’re trying to have our cake and eat it too. Can you go live in two months and still be maximally extensible? I’m really proud of the product that we built. Some of that is born from experience of what extensibility means. We have an opinionated view of what it means and have been able to accommodate some fairly exotic deployment requests and still do it fast. That’s really unique.

The second thing is our go-to-market and partnership model. We knew when we started the company that we wanted to work with the largest companies in the world. Not only, but we wanted to be able to work with the largest companies in the world and we’ve focused on that. As a consequence, we have a really unique partnership model.

There’s a fashionable thing to talk about: forward-deployed engineering in Silicon Valley. We don’t call it that, and it’s a very unique model because it’s not all about technology. Most of our clients build and maintain their agents themselves. It’s pretty easy to do. But we show up and we help you be successful. We’ll just show up. We’re not going to let you fail. I think that is very different. Because we have this outcomes-based pricing model, we don’t get paid unless it works.

Jack Altman

How much of that is technical versus change management?

Bret Taylor

It’s a mix of both. I don’t know if it’s 50-50.

Jack Altman

Do you think of it as two people or one person who does both?

Bret Taylor

We have a mix of roles. We’ve evolved that. We try to hire really technical people in all roles though because part of our secret is we want to be your trusted partner in AI. So you want the person who is working with you every day to be the most knowledgeable AI person.

Jack Altman

It’s like a forward-deployed change management engineer.

Bret Taylor

Yeah, exactly. What’s really neat about it, if you’re a really talented technical person who wants to transform an industry, you can do it at Sierra. We’re working with most of the healthcare insurance companies. If you want to change healthcare costs, what a cool vantage point to do it from. We’ve been able to attract some really remarkable people.

Beyond support: The full customer lifecycle

Jack Altman

You said that it’s not just support agents now. What else are you finding shoots in?

Bret Taylor

I’ll give you one of my favorite relationships: Rocket. Based in Detroit, remarkable story. Their founder’s done more for Detroit than I think any one person’s done for any city. Remarkable company.

They own Redfin, which is a home search site, Rocket Mortgage, which is the number one consumer mortgage originator in the country. They recently bought a mortgage servicing firm as well.

You can go to redfin.com and use an AI agent to search for a house. You can go to rocket.com and finance that house with an AI agent. And then with the acquisition of the mortgage servicing firm, when you’re servicing your mortgage, you’ll talk on the phone with an AI agent as well. Everything from finding a house to originating the mortgage to servicing that mortgage, I think that’s pretty cool.

They have an amazing CTO named Shawn Malhotra, pretty visionary. I love their CEO Varun too. It’s everything from finding a house all the way through servicing. It’s what we believe a lot of businesses will do, look at their entire customer lifecycle from purchase consideration—which is a fancy way of saying browsing. I think homes are probably one of the more considered purchases you could do—through executing the purchase, through having issues with it, all the way through retention.

For a lot of our telecommunications customers, their AI agent is actually doing negotiations. You’ve probably negotiated your cable bill at some point. Our agents are doing billions of dollars of negotiations for everything from satellite radio subscriptions to cable television subscriptions. It’s pretty cool. Over a billion dollars of mortgage folders a month.

Jack Altman

Basically all transactional communications eventually.

Bret Taylor

The way I think about it is: a website is a technology, but your .com, the one with your brand at the top, is your website. We’re doing that for agents. Agents will do a lot of things. The one with your brand at the top that your customers go to, whether it’s buying or servicing, we’d like to help you make that.

As agents go, they often interact with other agents. If you think about a home and auto insurance company, you may have a claim adjudication agent that’s quite complicated. Our agent that’s having the phone conversation when you’re in a fender bender will interact with that. But it is almost the intersection of all of that technology because it’s your front door.

Our whole hypothesis is that every company needed a website in 1997. Every company needs an agent in 2027. We want to be that company.

Jack Altman

What’s the nuance about agent builders though? I know you have a view that just being a generic agent builder is not the right thing.

Bret Taylor

I’ve been surprised by how many large incumbent enterprise software companies’ first foray into AI was an agent-building tool. It just feels like an inevitable commodity in my mind. Maybe making a website was hard in 1995, but today there’s a million ways to make a website. Most of them are open source. You have cool companies like Vercel, which I love, but it’s not like there’s a huge market for this stuff.

In practice, I think the same will happen with agent building. OpenAI will have a great tool. Probably all the foundation model companies will. There’ll be open source packages like LangChain and LangGraph. The idea that you have the right to win there… I don’t know if anyone has the right to win there because it’s just a horizontal technology and I believe in open source. It’s going to become a commodity.

My belief is that value is really going to be in agents that do things, hiring those agents and purchasing those agents for what they do. I believe in companies like Sierra, I believe in companies like Harvey. I really admire what they do. They have an agent that will do an antitrust review. I think there’ll be a finance agent that audits your financials. There’ll be one that helps you onboard a supply chain vendor.

Just think about onboarding a new vendor. There’s a procurement process, a legal process, a contract review process. Whether or not it’s completely autonomous or human-in-the-loop, all of that could be augmented by AI. That’s a product. Agent building’s not a product. Agent building is a technology.

Codex and the future of software engineering

Jack Altman

Speaking of the platforms, aside from being the founder of Sierra, you’re also on the board of OpenAI. You’re the chairman there. I wanted to ask you specifically about Codex. Over the last couple weeks, it’s been unbelievable. It’s like a curtain just came down. Did you expect this? Did you think that what has happened here was going to happen? When did you start to have an inkling that code was going to go vertical like this?

Bret Taylor

I’ll say yes, I expected it just because being on the board of OpenAI we talk a lot about it. All the labs—Anthropic and OpenAI in particular—talk a lot about using coding agents to help build AI. Certainly building an AI researcher is an important part of building an AGI lab.

The weird part about it, for me as someone who is a software engineer, is I didn’t feel it until I used it. You can talk about it all the time, and then the first time you one-shot something and it turns out really good—not slop, but really good—it’s an emotional experience. For me it was. It was like, “Holy shit. This is real.” As you said, it’s really over the past three months that it has felt really materially different to me. I’ve been thinking about it a lot.

I’ve been thinking about the past 20 years of software engineering. I remember the first time I worked on an engineering team that had real CI/CD, where you’d check in code and it would just automatically end up in production. I remember how it felt. If you’ve ever worked on an engineering team that did that versus one that did manual releases, it’s completely different.

Because to have something that can safely go from commit to production, there are so many things that have to happen to make that work. You end up relying a lot on testing—unit testing, integration testing, and canary testing—because the last thing you want is someone clicking a button and taking down the service. It’s almost impossible for a team that is doing manual releases to convert into true continuous delivery because there are so many implied processes that are incompatible with that. It’s easy to start that way and very hard to convert.

Clearly in three years, we could talk about what the best practices are to set up a software team that’s optimized for this technology and we’ll know what those best practices are. Right now we’re just figuring them out in real time. My hypothesis is that the companies that figure it out first will move the fastest. The other part of that is the companies that don’t will move much more slowly. Andrej Karpathy had a really interesting post about this too. A lot of folks are deep in here and have been thinking about it and it’s fun to see the industry you love flipped on its head in real time.

Jack Altman

It’s interesting because you have software engineers on one end and then somebody who’s in some part of the country where AI has not yet gotten its tentacles fully extended into. There’s a wide gap in people’s current comprehension of what AI’s going to do. It’s a little bit unknown. There are a lot of blog posts going on right now that are breathlessly saying it’s all over. I’m probably more in the camp of, maybe software is solved? I don’t know if it’s that.

But I’m curious if you have a view on whether Codex and Claude Code, the latest in coding, is going to change the way companies are built? Here’s one easy straw man question there. People, like my brother, have been claiming there’s going to be these 10-person billion-dollar companies. Are we at the precipice of that? Does that make sense? Are there other changes? What’s going to happen now?

Bret Taylor

There probably will be a 10-person billion-dollar company, but I don’t necessarily think it’ll be the norm. The reason for that is competition. If you imagine the mobile phone market in the United States, there are three main competitors: Verizon, AT&T, and T-Mobile. They’re all competing for a fixed pie of mobile subscribers. It’s why it’s extremely competitive. There’s promotions, there’s ads.

Jack Altman

They can’t make more of us.

Bret Taylor

They can’t make more of us. They can build up their network, they can do pricing and packaging. It’s a really complex business to run. All of them have access to AI, every single one. So the idea that you could deploy AI and not have to do things that you’re currently doing because of AI is probably true. But if any one of them figures out a way to use a person to gain market share against the other one, they’re going to do it. As a response, their competitors will do it too.

We spoke about this earlier. It’s the reason why when automated teller machines were introduced to banks, the teller job went away, but there are no fewer bank branches and no fewer people in those bank branches. Because JPMC or someone figured out, “Hey, if we put financial advisors in there and other things, we can actually make more revenue per branch.”

My personal take is that in a competitive market—and that’s the key, you need competition so people can’t just pass the cost savings onto shareholders or dividends—the second-order effect of the efficiencies of AI will be investment to compete, lower prices or customer acquisition or whatever it might be.

Jack Altman

We won’t have fewer engineers per company. They’ll just be way more productive, so you end up with way better software.

Bret Taylor

Or you might have fewer engineers and more of something else. Or you might have more engineers, I’m not sure. But the idea that it’ll be what it is today but just more efficient, I think that’s a lack of imagination, in my opinion. The interesting thing though is that software engineering does feel special. I think people extrapolating too much from software engineering are being a bit simplistic.

Jack Altman

You’re saying the same thing might not happen to every other function.

Bret Taylor

I’ll be really simple about it. Finance and software engineering might be limited by intelligence, meaning they’re largely digital. They’re largely manipulating digital things. You could imagine AI automating that.

Most of the economy isn’t exclusively digital. If you need to ship a t-shirt from Vietnam to here, you could automate some of that stuff, but at the end of the day, that cargo ship still needs to be in the water. Imagine you run a pharmaceutical company. You can think about how to make a therapy, but you probably need a wet lab. That intersects the real world. Maybe you could do robotics. But then you need a clinical trial. A lot of the economy is real.

It definitely will change the way companies are built, but I think when people say everything will be 10 people, billion dollars—

Jack Altman

It’s maybe just the stuff that lives in bits.

Bret Taylor

Yeah, that’s right. Which is a lot of the economy, but not the economy.

Jack Altman

It’s easy to talk about this, but you’re right. If you just move around the physical world and you get off of this podcast and this computer and into the world, there’s trucks moving dirt around and people who need a building that has lights in it. There’s a lot of physical things.

I tend to think the value of that stuff’s all going to go up until maybe robots happen. But in general, I think the value of bits goes down, the value of stuff goes up.

Bret Taylor

I think you’re probably right. Robotics will have a big impact as well. But I think people are thinking about this a bit simplistically. Intelligence is clearly on the cusp of going up exponentially, but it doesn’t mean adoption of that can be absorbed by the economy perfectly exponentially. I just think people are being a little bit simplistic.

Jack Altman

Do you think there are any cognitive things that are immune from intelligence? Dylan Field, when he was on this podcast, gave the example of “Brat Summer“ as something where he was just like, “That would’ve been such an insanely hard call for an AI to make. You needed so much context and taste and opinion.”

Where my head was going is, with coding, whatever’s happening there is happening. But what about brand or storytelling? I’m asking you this both as an operator and as somebody who’s very deep with OpenAI. Do you think that these other parts of intelligence also go the way of AI?

Bret Taylor

I don’t know if taste is necessarily related to intelligence. It might be. I’ve got three kids, including a 16-year-old and a 15-year-old. When they decide what they’re going to wear to school, I don’t think they would consider ChatGPT’s opinion. They care more about what the person in class next to them is wearing.

Similarly, if you go to the most elite, competitive college preparatory school, or the worst school in the world, there’s always going to be the smart kid in class and the dumb kid in class, the strong kid and the fast kid, and all these other things. It’s all relative and it’s all very local and it’s all very human.

The idea that because AI is smart, it takes something away from us as humans, I don’t necessarily subscribe to that. You see these things that go around online where people are lamenting older technology like the bicycle. We’ve been weaker than machines for my entire life. I don’t think it makes me feel weak as a person.

This is the first time we have computers that are going to be more intelligent than us. The emotions I had about Codex writing code that was high quality was an experience, because I might have some of my identity tied up in that task. The next day I woke up and I’m using it as a tool and now I can make better software. I’m like, “This is great.”

Jack Altman

Probably actually a good self-actualization anyway to go through that and be like, “Oh, I’m not my ability to code.”

Bret Taylor

People’s vocations and their identities are often very intertwined. But once you absorb the technology, I don’t think it’s actually your identity. I’m actually quite optimistic that we will be human. We’ll all be status-seeking animals. We’ll all compete for the real estate here in San Francisco. Even though our standard of living will go way up, we will all be jealous of people still. We will all compete. As a consequence, I think humanity will be just fine. That’s my view on it. It’s hard to imagine, but it doesn’t mean it’s going to be catastrophically bad. I think it’ll be largely good for humanity.

Jack Altman

Everybody’s already completely addicted to their phones and it’s a disaster. Now you have all this AI happening. A friend of mine was saying that he basically thinks it’ll actually become a status signal to become increasingly offline.

That might be an interesting call. I do think people will hit a tipping point with a lot of this stuff where all of it will happen. Intelligence will get so good and then people will just be like, “Enough of all of this.” Hopefully there’s a big screen time reduction.

You saw parents revolting about social media for their kids. A bunch of schools now, all the parents are like, “Nobody takes a phone. Everybody agrees.” So that’ll be an interesting thing. Is there an essential humanity that gets sharpened?

Bret Taylor

I hope so. I love the iPhone. It’s one of the greatest inventions of this century. I hope we’re not staring at a glowing rectangle in 10 years.

Jack Altman

It can’t be the right way to do it.

Bret Taylor

Now that AI can talk to you and you have human-computer interfaces, this is my hope. Hopefully humanity can become more self-actualized as a consequence of this. That is the purpose of technology.

Just like the Industrial Revolution had Luddites, and globalization led to job loss in the Rust Belt of the United States but certain goods got less expensive in other parts, there’s not going to be no issues. It would be callous and insincere to imply otherwise. But I think it will largely just really accelerate humanity in a really positive way. For me—and for anyone thinking about how this impacts them—have a more flexible view of your own identity. How you do your job every day doesn’t define you.

I love this metaphor, because it was so obvious before and after. Imagine being an accountant before Microsoft Excel and after Microsoft Excel. So much of the act of being an accountant was adding up numbers. Now it’s building a model. What you did, the value you provided, didn’t change, but the actual act of doing it is completely different. The skillset is completely different. A lot of us are just going to go through that in a very compressed period of time. It’s okay. It’s just a little anxiety-ridden.

OpenAI and advertising

Jack Altman

My last question about AI. There was a shot from Anthropic at OpenAI around the Super Bowl commercial about the ads. There were good ads, they were funny, but I think it sparked a debate around the whole topic of the role of these foundation labs, how they should bring AI to the masses, the appropriate business model, the trade-offs.

You’ve obviously had experience with social networks and a lot of different pricing models. You know OpenAI well. You know how to consume AI. I’m curious how you think about this. What is the right thing when you consider a lot of these dimensions?

Bret Taylor

I’m very optimistic about ads done in a tasteful way. I started my career at Google. I think I arrived the day AdWords came out. It was interesting because when I started there—you’ll laugh at this—everyone in my family when they found out I was working there was like, “How do they even make money?” and laughed. I think I listened to the Acquired podcast and it’s literally the most profitable business ever created. But as a consequence, Google is widely available for free for people who want to use it and has created an economy around it for demand-fulfillment advertising.

There are reasonable criticisms of advertising if it starts to get in the way of the sanctity of what the AI is recommending you, which was the backhanded implication. But I just think it’s not true. I actually think if ads are clearly labeled and not changing the experience, it’s really aligned with the OpenAI mission. Our mission is to ensure artificial general intelligence benefits humanity. Obviously the most important part of that mission is safety. But after you get past the Hippocratic Oath—first, do no harm—the job of a doctor is to cure you.

So after you say, “okay, it’s safe”, how do we widely distribute it? We have an obligation, being mission-driven. I’m the chair of the foundation and on the PBC board. Our mission matters. Being able to offer it for free widely is a huge part of that and we need to be able to afford that.

I just find it inauthentic. This is an incredible opportunity to provide this at scale to society. The idea that it will somehow taint the experience is too strong.

Jack Altman

It’s funny. I grew up in the suburb of St. Louis, so it’s a whole different world than what we’re in now. When I think about people that I grew up with or from other parts of the country, $20 a month is a lot. It’s easy to forget in our ecosystem that not everybody wants to or can spend $20 a month on stuff, but they really want these services. If the whole world had to pay for Google, that’d be a worse world. It’s really good that everybody has access.

Bret Taylor

Absolutely. I just think it’s important we do it well and we will.

Jack Altman

People want good ads. I like good ads. If people bring me the right product, I’m like, “That’s really nice.”

Bret Taylor

This is the other part of it. You want businesses to be able to grow from scratch. There’s such a purpose to it. It just needs to be done in the right way. I find the discussion not particularly authentic.

How to run a board

Jack Altman

The last thing I wanted to ask you about was how you’ve chosen to finance the company. I’m curious about three parts: 1) how you got started and working with Peter Fenton, then 2) what you’ve done since then to date and what’s been important for you, and then 3) as you think about the future, what’s important to you as you think about other partners or capitalizing?

I’m asking because this is a podcast that has a lot of VC in it, so I gotta have a little flourish.

Bret Taylor

We have three members of our board, which represent our three rounds of investment. Peter Fenton from Benchmark, Ravi Gupta who just left Sequoia though he’s still a venture partner there, and Neil Mehta from Greenoaks. Just a fantastic group of people. I chose them all for both the firm and the person.

Notably, with Peter, I’ve worked with him at both my previous companies. For our first round of financing, I didn’t talk to anyone else. I introduced him to Clay, my co-founder, who hadn’t spent time with him. We talked once, he sent me a term sheet, I signed it, no edits. It was very much a trust relationship.

One of the things I’ve really appreciated about Silicon Valley… There are some downsides to how insular the community is, but one of the great parts is the relationships you can forge over years. For me, it meant Peter and I could start on third base just because we’ve worked together a lot before. You don’t end up with a lot of the… There’s no funny business in the fundraising process. No funny business in the boardroom. It’s just, “Let’s get to work.” It was fun to get the band back together there.

But the fun part for me is I had never worked with Ravi nor Neil before, and Clay and I just… It’s just a great board, people we seek out advice from as opposed to people we report to every quarter. It’s amazing.

Jack Altman

We won’t go back through the story, but when OpenAI had its “Oh my god” moment, Sam was like, “Bret, you’re the board member”, and then you’ve also got a board. You’re in both roles at once. How do you make the most out of a board? Obviously you’ve got these particular relationships, but what do you expect that relationship to look like?

Bret Taylor

First, I really like written documents for boards over presentations, both as a board member and as a founder of a company. You end up letting people synthesize information ahead of the board meeting, so you end up with more substantive discussions in the boardroom.

I’ve done this for the last two companies I’ve started. It’s just been great to send out a board document. Sometimes people will comment ahead of the meeting, but the main thing is it has been read, ahead of time. Then you end up with a meeting about the actual meat and potatoes of the topics. You’re not staring at a bunch of sales numbers for the first time.

Jack Altman

You’re not running through slides.

Bret Taylor

You’re not running through slides. I find it to be incredibly… I think most companies should be run this way. The other thing that is really interesting: don’t write it with AI. It’s so funny to have to say that now, but I find that—

Jack Altman

The process of the writing.

Bret Taylor

The process of writing is a process of clarifying your thoughts. For Clay and me, this is a process by which we synthesize what’s been happening. You know it and talk about it, but to actually write it and write it eloquently and concisely is incredibly important because it’s essentially a way of… What’s that famous line? “If I had more time, I would’ve written a shorter letter.” Spend the time, because that’s actually how you can show respect to your stakeholders, that you’re thinking about the strategic issues going on in your business.

The last thing I’d say is that board members aren’t single-issue voters, but everyone has their strengths. At OpenAI we’ve recruited a pretty diverse set of skills. Zico Kolter is a professor at CMU and specializes in, among other things, jailbreaking. He’s one of the experts on some of the more subtle safety aspects. Nicole Seligman was a great attorney and she’s an expert in a lot of legal issues. What’s really nice is that when you grow out a board beyond your initial investors, find people that your management team will want to go to for advice. Obviously the audit committee chair and your CFO have a really unique relationship.

Who’s your head of sales going to go talk to? Do you have someone who’s been there, done that? Because you want them to have that kind of relationship. I always think of it as, who are the advisors you want to surround your management team with? A functional board really has those relationships. Then when you’re in a board discussion, you have all these board members who have had lots of engagement with the company, but in a really valuable, targeted way.

I like to think of the board as a collection of people. Don’t look at the individuals. The whole should be greater than the sum of its parts.

Jack Altman

That’s awesome. Anything this year you’re particularly excited about that you can share?

Bret Taylor

The real exciting part is going to be adoption in regulated industries. We are moving beyond the early adopters to everyone. If we talk a year from now—

Jack Altman

You’re going to be doing the hard stuff.

Bret Taylor

It’s going to be the really hard stuff.

Jack Altman

That’s awesome.

Bret Taylor

If you want a hot take, my intuition is that regulators will start asking for agents. The idea that you have a human set of controls over a regulated process will start to feel like a risk, rather than the risk being AI. I don’t know if that will happen this year, but I think that will happen.

Jack Altman

Alright, I’ll call you in a year and we’ll do take two of this and see.

Bret Taylor

That sounds great.

Jack Altman

Thanks so much for doing this, Bret. This was great.

Bret Taylor

Thanks for having me.

Peter Fenton is the longest-serving full-time general partner at Benchmark. Over the last two decades, Peter led investments in Twitter, Yelp, Elastic, Docker, Zuora, and many others. More recent investments include Sierra, Ollama, ClickHouse, and Airtable. Peter has been on the Forbes Midas list 18 years in a row.

Eric Vishria is a general partner at Benchmark. Eric led investments in Confluent and Amplitude, both of which IPO’ed in 2021. He is also an investor and board member at Cerebras Systems, Benchling, Contentful, among others. Most recent investments include Fireworks, Quilter, and Greptile. Before joining Benchmark, Eric was the co-founder and CEO of a social web browser company called Rockmelt, which was sold to Yahoo.

Chetan Puttagunta is a general partner at Benchmark. Eric is an investor and actively involved with Elastic (which IPO’ed in 2018), Legora, Manus, LangChain, Airbyte, Cursor, Reducto, Numeral, and the list of great companies goes on. Noteworthy exits include MuleSoft, which was acquired for $6.5B by Salesforce and Acquia, which was acquired for $1B in 2019. Prior to Benchmark, Chetan was a general partner at NEA for seven years.

Ev Randle is the newest general partner at Benchmark. Prior to joining the firm, Ev invested in Anthropic, Chainguard, Databricks, Flock Safety, and SpaceX, among others as a partner at Kleiner Perkins. Through his experience at Founders Fund and with personal capital, Ev also has invested in Rippling, Ramp, Wave, Faire, Figma, among others.

Timestamps:
(0:00) Intro
(0:18) Becoming more rare to stay small
(4:58) Activities that degrade with scale
(9:08) The principles of Benchmark
(14:07) Contributing as much as you take out
(18:37) Doing the right, hard-to-sell things
(23:31) Benchmark’s relationship with founders
(31:29) What makes a quality investor
(36:15) Cultivating different tastes in founders
(39:56) Spotting special people
(46:06) Consensus vs non-consensus bets
(47:50) Investing in founders, then AI
(53:06) Founder centricity matters more than ever

Links:
https://x.com/peterfenton
https://x.com/ericvishria
https://x.com/chetanp
https://x.com/EverettRandle
https://x.com/jaltma

Watch on YouTube; listen on Apple Podcasts or Spotify

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Clips

What degrades with scale

As many VCs raise eye poppingly large funds, Benchmark is one of the few hold outs staying small.

Peter articulates why this is integral to how Benchmark works.

"More capital equals a whole bunch of activities that...eat at the essence of why we practice the business.”

Most people talk themselves out of investing

Eric Vishria is an incredibly clear thinker and communicator.

Here he talks about passing on investing even when the founder is clearly special -- he gives the example of Alex at Scale.

"People will see that specialness...and talk themselves out of stuff for other reasons."

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

Why Benchmark Stays Small

Jack Altman

Benchmark team, it is an honor to be here with you all. I’m not going to make you all reply in unison to me, but I’m really excited to do this with you.

I want to start with an observation. Of the top VC firms, whatever you want to call that—I’m thinking of Founders Fund, Sequoia, Thrive, Andreessen—most have scaled in a big way. For whatever set of reasons, that has been the dominant strategy. Benchmark has been a stalwart in some ways to hold out, with a small firm, small team, small-ish capital base.

I’m curious why. I’m sure you all have different opinions on this, so to pick somebody randomly, Chetan, what is your take on this topic?

Chetan Puttagunta

We only do one thing, which is partner with founders early. We really like to partner with them really early.

I think the favorite amongst all of us is partnering with a founder pre-launch, at the idea phase, or when it’s two or three people in a room, and just growing with the firm. In terms of measuring happiness for each of us, that’s where we derive the most professional satisfaction.

If you think about what that does in terms of alignment between Benchmark and the founders and that company, it’s pretty amazing if you’re there from step zero. I would argue you can’t do that as you scale, the interests… We see it in all our board meetings. Every round becomes its own thing, its own game.

Jack Altman

One of Benchmark’s things that we’ve talked about is that you don’t do the future rounds. There’s no conflict of interest.

Chetan Puttagunta

That’s right. We’re fully aligned on dilution. We’re fully aligned on trying to make this the biggest outcome we can. Capital constrains you in that way. Time constrains you in that way. Each time you partner with a founder, you’re doing it with extremely high conviction and going all in.

That, to me personally, is an extraordinary experience. There are different models, different ways of practicing the business, but for me, this is the way I love practicing it. It’s becoming rarer by the day, and therefore it becomes more differentiated.

Jack Altman

Peter, you’ve been here the longest, so you’ve obviously seen Benchmark in its context through a bunch of changes around you. Have you felt tempted at any points? Have you felt strengthened in your clarity on what it should be?

Peter Fenton

You have your behavioral experience on a Monday, which is when we aggregate. Today is a Monday, we’re here with you. It feels great. There have been eras in the business that I’ve participated in when the Mondays sucked. Some of those were just cyclical. You have a downturn in the economy. Your partners are bringing in their struggles, their pains, channeling the entrepreneurial landscape at that moment in time.

What I was struck by is that period of time that I’ve spent—I’ve had time at Accel and I’ve had time at Benchmark—when that felt more self-inflicted, not market-driven. The lived experience, the behavioral experience, the joy of the business, is centered on serving entrepreneurs. As Chetan related, getting close to an entrepreneur, being a deep partner to them, a social, emotional partner, strategic partner. On a Monday, if we’re talking about that, it feels really good. It feels aligned and purposeful.

When the Mondays were talking about friction with the European effort—and I’m sure the European partners at the time, now called Balderton, were talking about problems with us—it felt draining. When I joined Benchmark, they had just raised over a billion-dollar fund in Benchmark IV. The overhang of the misfit of how we practice our business of partnering early, going shoulder to shoulder with the entrepreneur, and deploying that volume of capital…

There are a number of things that happen when strategies are misaligned with purpose and values. The main thing that happens is it’s just less fun. I looked at this simple question. Our Monday meetings go somewhere between six to eight hours. How much of it is joyful and aligned, and how much is dealing with stuff that doesn’t bring us purpose and meaning and value in the business?

What I feel like we got right is that we select people who care mostly about the proximity to the entrepreneur and being able to deliver a meaningfully differentiated experience for them. So they come away and give a reference to us that says, “Benchmark shows up on all the recruiting calls. Benchmark is at the epicenter of our tough decisions. They’re always available.” “They” being us individually, and then as a group.

Scaling, just asking the question of more capital, equals a whole bunch of activities that I think degrade, they eat at the essence of why we practice the business. The outcome of maximum cash-on-cash multiple is degraded with scaling. The quality of the relationship with the entrepreneur is degraded by scaling. Ultimately the joy is degraded because there’s some other thing that’s growing, an incentive system that fuels “more is more.”

It isn’t wrong for other people to do it. I just know what their Mondays feel like. We leave Monday and carry that energy and effervescence and sense of purpose into every day that follows. When we didn’t do that and we had more activities, more extracurricular activities, man, it felt the opposite. You wanted Monday to end, and then you were a little less of yourself the rest of the week.

Jack Altman

How about you, Eric?

Eric Vishria

This strategy is not financially maximal, for us. No one’s crying for us, we’re doing fine, but it’s not financially maximizing. It’s happiness maximizing. It’s happiness maximizing for the kind of person who wants to do the work.

Jack Altman

Can I put a third variable there? There’s happiness and financial. If you had to put a third variable of “impact”, do you think that you can have the most impact this way? Or do you think you could increase your impact if you worked with more companies, even if you suffered a little bit for it?

Eric Vishria

I don’t know that the way we do it scales, unfortunately. It just doesn’t scale.

Jack Altman

Is that because of the board seats?

Eric Vishria

Yeah, it’s the engagement. The engagement with the entrepreneur is the time limiter and the constraint. That’s it.

Jack Altman

Ev, you obviously came from bigger firms, Founders Fund and KP. I guess you’re only two months in now?

Everett Randle

Three months.

Jack Altman

Your experience on this has to be notable because it must operate so differently.

Everett Randle

One of the beautiful parts about the asset class today is that the menu is so large in terms of how you want to spend your day to day and what you want your life to look like as an aggregation of that.

Even among firms that are larger, KP is very different from Founders Fund, which is very different from Sequoia, which is very different from Andreessen, which is different from Lightspeed and GC. Some firms are more similar than others, but every firm is actually quite distinct.

The thing that really stands out about Benchmark—to Chetan’s point about it being even more relatively differentiated than it was in the past—is that as the prevailing trend has been toward scaling and getting to mega scale… I talk to some of my friends and peers at some of these larger firms and the way that they talk about their day to day and their job and how they’re getting fulfillment out of their job… Let’s say it’s over the summer, they’re like, “Yeah, I’ve already done four deals this year, so I’m having a pretty good year.”

Jack Altman

That’s quite a lot.

Everett Randle

That is the North Star and KPI of what’s giving you fulfillment? Do you like the founders? Do you like the companies? Or is it just the fact that you’ve shoved capital into four investments and four companies?

Jack Altman

This gets at one of the things that was a noteworthy difference for me, going from running a company to now doing investing. As a company, money’s involved, but the primary work is about a product and customers. In venture, there is at least one way to practice it where it’s primarily about dollars. I just don’t think that’s a path to happiness.

Everett Randle

It can be for some people. This is a group that’s very much self-selected into maybe the Charlie Munger punchcard approach, where over your lifetime you might only have ten meaningful partnerships. So every single one of those partnerships should be unbelievably meaningful for you and for the founder you’re working with. I think that fundamentally comes into conflict with the idea of each of us going out and doing eight investments a year or scaling up massively.

The Equal Partnership and Benchmark’s Culture

Jack Altman

What are the principles or foundational tenets of Benchmark? If you had to describe the three to five things that define what Benchmark’s about, how would you name those?

Chetan Puttagunta

We want to be the first call for an entrepreneur. We want to be their most important and most impactful partner. It’s pretty easy to quantify. You can ask any of the companies we all work with. Who do you call first when you hit a patch of bad news? Who do you share that with? We want to be that person. That can only come from being there for the founder, having full trust between you and the entrepreneur, and the entrepreneur knowing that when they speak to one of us they’re getting an authentic experience.

I’ve noticed with these large groups that we’ve all been part of, boards and stuff, whenever bad news gets presented in a board meeting, you can see panic in some people in the room because they have to go tell their boss, with the board meeting notes afterwards, “Things are off track.”

Jack Altman

By the way, it’s also a reflection of something in the relationship if they’re learning bad news live in a board meeting.

Chetan Puttagunta

Sure, 100%. We’re working with such unformed companies and people that there’s going to be bad news. If you aren’t expecting that, then you’re doing this job all wrong.

Things go well, things go badly, things go sideways, things go up, things go down, stuff happens. As long as the entrepreneur knows that they can call you and you’re going to be there and there’s trust there and you’re that first call—that’s what we aspire to in every single one of our relationships.

Eric Vishria

So there’s that part of it, which we’ve talked about a bunch. And then the other part is the equal partnership. I think that’s a very special thing. Ev’s been here for a quarter, Peter’s been here for twenty years. I think I’m on eleven. You’re on what, eight?

Chetan Puttagunta

Yeah.

Eric Vishria

That equal partnership is really special and something that also doesn’t scale, frankly. It has a very special dynamic. I remember when I joined and you’re just this new person. It’s my first investing job. Peter and Bill and Mitch and Matt, who were the four that I joined, they’re asking me about doing things. You’re like, “I have no idea. I have no idea how to do this job or anything else.” But I think it relates to this deep belief in the equal partnership. I think it’s very empowering for a new person. I found it very empowering.

Jack Altman

Ev told me he was disempowered.

Eric Vishria

He was disempowered right out of the gate. I think it is very empowering for the new person. It also creates, for the right kind of person, a lot of internal drive and expectation because you’re like, “Oh, I better not fuck this up.” I think that’s a magical piece of it.

Jack Altman

Why is it so hard for most people to do this? I think a lot of other firms want it, but it effectively rounds to zero the number that can do it.

Eric Vishria

I have this belief that the biggest leap wasn’t at the founding of Benchmark. The founders came together and figured out how to cut things up, and they decided it’s equal. But then they had an amazing first fund. Benchmark I was a legendary 70x return or something like that.

Jack Altman

eBay.

Eric Vishria

So they built all this brand value.

Jack Altman

They gave it away.

Eric Vishria

And then they gave it away. I think that was the leap.

Jack Altman

Nobody can do that.

Eric Vishria

That, I think, is the hard part, right? It’s like, “I built the firm, I built the brand. I should get some economics from that.” Whatever it is.

Chetan Puttagunta

No residual economics is the craziest thing.

Jack Altman

Nobody does that.

Eric Vishria

It’s the craziest thing. It’s the craziest thing.

Jack Altman

There’s no incentive really to do it unless you really care about legacy and something other than yourself. The incentives are very thin.

Peter Fenton

It’s also just rooted in the culture of Benchmark. You go back to Bob, Bruce, Andy. All the founders have played their part. But it was rooted in this idea of respect and affection. You should have a partnership where you really respect and admire your partners. You’d give all your money to any of your partners but then you admire them. There’s an old saying that a virtuoso is somebody who surprises even themself. I believe that about all my partners practicing the business. They’re virtuosos in the aspects of the business that motivate us to do the work.

So Bob raised his hand, I was there, and just said, “It’s time. I’m out.” Others had left before, Andy and others, but there was never a conversation. It was actually the opposite. We gave him economics in the fund. They weren’t giant economics, but it was just a way of saying thank you.

I think as soon as you get into the parts of everyone’s identity that are ego-driven, they lay claim to things psychically that make sense to them. It would never make sense to ask for something from this firm that would entail taking more than you’re giving.

It’s a weird thing to say, but it’s a pressure that I feel as the last of the prior generations. I want to be raising my hand first, before I realize I’m not contributing more than I’ve taken out. Not because it’s an explicit trade, but it’s a cultural ethic.

Cultures, as you’ve found in your company, are so durable. The inertial forces of a culture that gets founded… You asked, what is Benchmark? If I read one book that captures Benchmark, it’s Carl Rogers’ book, On Becoming a Person. The premise of the book is very simplistic in a sense. It was the apex of client-centered psychotherapy. The premise of the book is that to be useful in a relationship, you have to first permit yourself to understand the other person fully.

I think if Benchmark is doing its best work, an entrepreneur comes in here and says, “They see me.” I bet if you ask Andrew at Cerebras who understands him and the founding team most fully—the purpose and the vision of the company—it wasn’t that we found this hire for him, or we gave him this advice about negotiating a contract with company XYZ. It’s that Benchmark understands what he wants to do.

We then do something else that I think is equally important: unconditional positive regard. There are examples in the past at Benchmark where that’s been broken. I think an immune system builds around those failures and says, “How do we not do that again?” as opposed to saying we’re defined by that one act.

So what you see in the current lineup at Benchmark is a really emboldened immune system. We’ve had some vaccinations from past experiences to basically say that we never want to be in a position where the relationship degrades, where there isn’t that faith that we’ve delivered unconditional positive regard. We believe in founders, oftentimes more than they believe in themselves.

If you understand the founder fully and you have unconditional positive regard, then you really can empathize with what they’re going through. I think that nurtures the sorts of success possible with founder-entrepreneurs that we all hold out as the great examples of why we do this job.

Jack Altman

I remember when we spoke last, you talked about the fact that when the Benchmark seat was given to you, from the beginning it’s like, “I’m going to give this to the next person.” I can see why. You’re saying the seminal moment was actually the handoff, because that creates the instigation for all the future handoffs.

Eric Vishria

Yeah and you feel responsibility with that. I think all of us feel responsibility. That was one of the big things we talked to Ev about as Ev was joining.

Jack Altman

The responsibility.

Eric Vishria

That responsibility, you just feel it. Not everyone feels that, which is fine, but—

Jack Altman

Totally. Also, I think if you’re walking in and it’s equal from the beginning, a bunch is given to you at the start. You’re like, “I gotta pay this off to somebody. The people who set me up from the beginning, I can’t really pay them back anymore.” So I can see why you’d be like, “I gotta make sure I give enough before I go”, even though you’re, in a weird way, paying back prior generations. That makes sense.

Peter Fenton

Rooted in that as well, Eric says responsibility and I think he feels it and I respect that. I think the founders gave us permission to basically not take it too seriously.

Eric Vishria

Yeah, they did.

Peter Fenton

They said, “Listen, come on. There’s a group of you. No one’s going to be around in a million years.”

Jack Altman

It doesn’t have to be so heavy.

Peter Fenton

“Everything’s ephemeral.” So what you want is a tight-knit group of people at maximum potential manifestation. The energy, the joy.

The heaviness of “Oh, we’re going to have to maintain this relic and wheel it out. The old tablets in the back about what the founders said…” None of that bullshit. This is a day-to-day thing.

By the way, forgive me. We’re in an entrepreneurial environment where when somebody has a legacy, we want to destroy it. We’re in the business of creative destruction, not permanence and enduring. Forgive me.

Our startups bubble up from nothing, and we stay true to that. I think the firm’s premise is that we should have our own form of creative destruction. There’s no legacy or claim to it at Benchmark. It’s the immediacy and present moment that we deliver. Everything else is secondary.

Being Founder Friendly

Jack Altman

One of the things you just said, I hope is okay for me to press on. I’ve wanted you guys to talk about this. I know each of you individually and I know you all are founder friendly. It’s very easy for people in a competitive venture landscape to poke at one historical example that everybody else has done. If you’re just loud, you can poke at people.

I would say you’re not loud externally and you have a mindset of “we’re going to let our actions speak.” But I’ve wanted you guys to speak because I know you’re very founder friendly. I’ve talked to founders you work with and all of that.

So I’m actually curious to hear your thoughts. You’ve seen some of this stuff. Is it important for you to talk about… It’s what you just said. There’s a thing and then you have an immune reaction to it and the firm updates? How do you process all of that?

Peter Fenton

Humans are storytelling animals. Every firm has their story, and depending on the situation and the motivations of the counterparty, you accentuate certain parts of a firm’s history.

The ethic of the firm—and I think this is borne out even in our worst moments—is that the company must come first. We’re not more important than the company. Nobody’s more important than the company. It’s the initiative, the collective premise of an entity that’s bigger than one individual.

There are moments in the past—and I’ve been around through the generations—where it used to be the standard model that at some point you’d ask, “When are you going to get a real management team?” That sort of faded to, “Well, perhaps we can go the distance. You have the Steve Jobs narrative, which raises the question of what crimes were committed against this notion of general management versus the founder mode reality that we all support.

The part that’s most relevant, and this is what happens every day here, is that we view our job—I do personally, and this has been borne out in the references—as making the founders the best version of themselves. Like any relationship, if it’s simply sycophantic and enabling and codependent, we make them worse. If it’s harsh and judgmental or absent, we make them worse.

So one of the things you need to figure out in references is, what questions should you ask? If you’re going to engage with any great firm, you want to do references. First it’s a phone call but I actually think you could go a level deeper and ask, “How does this person make you a better entrepreneur? How have they unlocked your potential?”

What we care about more than happiness is flourishing. In our companies, I think what’s borne out in the work we’ve done is that if I work with that group, I’m going to be a better version. I’m not going to be living in fear, because then you’re not a better version of yourself. Nor am I going to be getting… Forgive me, what happens in our job right now, I’m struck by the number of boards where I see a relationship that’s sycophantic, where people are afraid to pursue truth because they don’t want to hurt anyone’s feelings.

Worse, I think the greatest crime that occurs in many boards is that somebody says something behind the entrepreneur’s back that they won’t say to their face. One of the things I think is a deep ethic at Benchmark is that we are transparent. We’re going to say it to your face. We may not say it behind your back. We’re not going to be in a situation where it’s like, “here’s what I really thought about the board meeting….”

This idea of congruence, which is a key term in psychotherapy, is that you really want to know that you can trust your partner, that they’re not putting on a mask because they want you to feel a certain way. They’re being real.

Jack Altman

By the way, this also goes to your point about not putting more dollars into the company. If you almost structurally can’t put more dollars into the company, then you just want to tell them the truth.

Peter Fenton

You’re truth-seeking.

Jack Altman

If you’re hoping to win the next round, you don’t want to piss them off because next month you might be writing a term sheet.

There’s the references piece. There’s the “I want to put more money into this company” thing. There’s just the “I don’t want to fight” type of stuff. I do think it leads to that. I think the best version of being founder friendly is not comfort all the time, obviously.

Everett Randle

There was a recent example of this. I recently led an investment that’s still unannounced. We actually had the founders over for dinner in the dining room where we’ll have lunch in about an hour. During the dinner they showed a demo. We were going through their commercial strategy and we gave them a lot of very direct feedback. A lot of it was constructive. It was a really productive conversation. But not every founder responds super well to that.

So I called the founder afterwards and said, “How was that for you? How would you respond to that?” In that call he said, “You as a team are going to make us better founders. I can tell that right away.” Because of that, he really wanted to work together, because it wasn’t just going to be slaps on the back and congratulations. It was going to be a relationship where we really pushed both the founders and the whole team to be a better version of themselves.

Jack Altman

Does it feel structurally different to you than KP and Founders Fund in any way?

Everett Randle

I think maybe the biggest difference is with Founders Fund, because Founders Fund really leans on this kind of Hippocratic Oath of VC, which is “do no harm.” In doing so, we’re going to be completely hands off, that’s kind of the pitch, and if you need something, call us.”

I think that sells really easy. But in practice, I think it sometimes materializes as… I don’t want to say laziness, but it is more passive. It’s like, “We should back founders that are going to figure it out all on their own and don’t need help and don’t need any VC assistance.” Sometimes that works out, and maybe there are founders like that. But I think the vast majority of the time, almost every single founder could use feedback, a sparring partner, any of these things.

Jack Altman

Even Tiger Woods has a coach.

Everett Randle

A hundred percent. Having that position is a great soundbite and goes over really well on Twitter, but when it comes down to it, there are very few practitioners, even the Tiger Woods of the world, that don’t benefit from something like that.

Peter Fenton

Ultimately, the highest accolade of a firm that it seeks is a manifestation of its value system. Everyone in this room—I’ve heard this and I know I’m going to hear this on your newest investment—is that if we’ve really done our job, and you’ll hear this in our references, they feel like a co-founder. Benchmark feels like they were a co-founder.

What does that mean? It wasn’t a conditional transaction. It wasn’t a one night stand where “they gave us money and then we could brag about the brand.” It was that they were proximate with me. What a co-founder does, it’s a bit like being in a partnership where you have a child. There’s something existentially deep that’s permanent in that relationship.

I believe most companies with single founders end up finding proxy co-founders because they need support systems. They need a relational balance with the ups and downs of being an entrepreneur. If we’ve achieved that— You could say it’s not for everybody. Some firms might want more of just the money and the brand. Or they want services delivered by people who work at the firm. Those are different facets.

But the depth that can occur when you have that kind of proximate relationship ends up taking you through troughs that would otherwise leave companies to be sold early or to have a destitute founder who’s just tired.

Jack Altman

There’s also a through-line to it. I felt this as a founder where even a longtime exec might be four or five or six years, but then you have a board member who’s there through the first round, and the second round of execs, and the third exec team. So you’re working many more hours per day with people on your team. But when you look back over a decade, there was somebody who was with you the whole time and it’s hopefully your co-founder and your board members. There’s something about the long arc of it too that is special.

Eric Vishria

I have moved away from talking about it as guidance or advice. I loved your “sparring partner” thing because I think that’s what it is. That’s what the co-founder thing is too. Startups are hard. They’re really hard. The most successful startups are doing things that are new, innovative, and haven’t been done before. Therefore, you’re figuring things out for the first time. They’re things that are challenging and hard and no one knows the answer.

A huge part of the co-founder thing… We should be careful about using it, but that aspiration or that idea is: we’re asking each other questions that sharpen our thinking. We are trying to figure things out together.

That’s a very specific way of working. I’m thinking of a very specific example from last week. Oftentimes, the entrepreneur knows what she wants to do and it’s in there. You’re asking questions to help them realize it and have it surface or get clarity on it. That’s very different from getting advice. That isn’t advice. That’s a sparring partner and a sounding board.

Peter Fenton

Part of what I feel is—forgive me, this is where I have to be the older person in the room—the degradation of our industry. It really has been a degradation. The system has shifted to winning. Our goal is to win.

Eric Vishria

Right, because there’s capital supply now.

Peter Fenton

You have these large sums of capital that need to be deployed. The system is built to create, in the mind of the entrepreneur, a selection criteria. The old saying: if you’re doing POCs, you want to design the criteria of the POC so you win it.

What’s happening is that the industry is programming entrepreneurs in a way to select for things that I think are off target. They’re aligned with the target of the firms and the capital basis they’re deploying, but they’re off-target relative to the quality of the relationship the entrepreneur seeks.

Jack Altman

So what are the big ones?

Peter Fenton

The biggest thing— I’m not going to pick on the off-target things. The on-target things are: when I want a co-founder, what questions do I ask? Do they make me a better version of myself? Do they provide the kind of expansion of my horizons that makes me feel more joy every day for doing this work? Do they keep me honest? Are they available? Do they put me first?

A lot of winning, as opposed to serving… Winning is a moment in time. We average 10+ years on our boards. If you go back and look at the history of my boards, it’s 10+ years. Maybe three or four executive teams, as you say, might go through those years.

The sense of continuity of, “my partner is there.” Not to pick one, but I love my relationship with Howie Liu at Airtable. Howie’s going through a genesis right now and a creativity that I think occurred at the beginning of Airtable. It is so fun to watch. But I understand the human and I know what he’s gone through. I know how to help him at parts, to say, “This is an area you want to be asking some questions about.”

I think that’s different from winning. Winning was a transaction: “Take my capital, I’ve got to get onto the next one.” Because if you win, you’ve got to win the next one.

We say yes once or twice a year, and serve for a decade long. The differentiation of that—because our incentives aren’t the same as deploying capital—creates in the entrepreneur’s mind that they have to ask the right questions. What do you want in that co-founder? Because you can’t fire your board member.

Jack Altman

I’ll take a shot at one of the things I think is off target. It’s become a thing to sell “no board seat”. The pitch is, “one of the advantages of working with our firm is we’ll give you all this capital with no board seat.”

I think there’s a misunderstanding of boards as governance and control rather than boards as signing up to work on the company, which is how it should be understood in 99.9% of cases. But I think it has been very effectively and somewhat disingenuously sold to founders because it sounds good. You keep control of your company and there’s no risk. That means we don’t have to help, so we can deploy a lot more capital.

Everett Randle

It probably says something about the experience of the average founder with the average board member. Can you blame a founder for thinking that’s a good pitch based on the experience that they’ve probably had with the average firm?

Jack Altman

Yeah and also you hear about a terrible situation once and it makes a big impact without nuance. It’s hard.

Peter Fenton

It’s going on right now. These seed rounds at over a hundred million with no board. I know how it ends. It’s just that between now and then, the amount of entrepreneurs that will miss the opportunity to really seek out a close partner, it’s such a shame.

What Makes a Great Founder

Jack Altman

Here’s one of the things I wanted to ask you all about. I’ll take it as a premise that we probably all agree a great entrepreneur is unique or odd or strange or just beats to their own drum in some important way. Maybe there are examples where it’s not like that. We can talk about that too.

Do you think to be a great investor you have to be the same way? Do you have to be unusual as a person to be a great investor? Or is that not the case? Can you just be a regular person who can spot unusualness? I’m asking selfishly because I don’t think I’ve got the oddities that sometimes I wish I had.

Chetan Puttagunta

One of the things about Benchmark in our conversations with Ev… I think Peter framed it perfectly, which is that when you know, you know very clearly. Given our structure of equal partnership, you’re essentially refounding the firm every time somebody new comes on, because the whole dynamic of the partnership changes. The conversations change, the feel changes, everything sort of changes. So it feels like a refounding moment.

There’s some alignment that happens. It goes back to the core of what values you prescribe to as a person. Part of it is that you are competitive. I think that is important. There is a competition aspect to this asset class. At the end of the day, we are investment managers. You enter a company and there’s competition to enter the company, then you invest, and then the company itself faces competition at some point.

You can run competition-free for maybe twelve months, and then the big guys show up. Each of us has faced immense industrial competitive threats from external bodies. You have to have some kind of competitive, persevering spirit about you that can be that stabilizing force for the founders.

You also have to have that empathy that the founders feel it 10-100x more than you. At the end of the day, you as an investor are diversified. You get to work on lots of projects. The founder is simply not diversified at all. This is the only thing they get to work on. This value system of hyper-competitive energy and empathy, that is actually not present in a lot of people.

Jack Altman

You and I talked about this a little bit with Max at Legora. It’s an interesting example. You did the seed. We’re not here to pump Legora, but while we’re here—

Chetan Puttagunta

Let’s pump.

Jack Altman

It was in YC. It’s a legal tech company in Stockholm. There was already Harvey. The question I think I asked you right before we sat down was: why’d you meet? I think once you meet Max, you can see it’s good. But to the extent that that’s a case study in spotting someone who I think is unusual in a very positive, strong way, what was that for you?

Chetan Puttagunta

Peter and I actually met Max in this exact room together, and that was the first meeting we had. I think within fifteen to thirty minutes, we both came away with that unspoken language between us that we want to be in business with this person.

Yes, it was legal tech, but there was some core purpose with him as he was expressing it and the founding story of how he picked that problem. They’re sitting in Stockholm watching Harvey. At the time of our seed round in March 2024, I think Harvey had already raised at a billion and a half dollar valuation or two billion. By the time the product had launched in October of 2024, I think their number one competitor had already raised at a three or four billion dollar valuation.

But what we were backing was him and his co-founders. When we invested, it was a team of five people. They had a very core insight on how to attack the legal market and why LLMs were the perfect fit for lawyers.

When he expressed it… Eric likes to say this a lot. There’s a magic when founders explain something very complex and they explain their unique insight into it, and it becomes very obvious. That’s obviously how the world should work, and with their fire and their energy, that will probably be how the world works.

In Max, we saw it right away. So we needed to be in business with him. That was it. The conversation immediately went to, “Great. What are you doing the rest of the day? We just want to spend time with you because clearly you’re spectacular. Clearly there’s something here.” It’s been amazing.

We didn’t see it right? The product didn’t launch until six months after our money went in. You don’t start to see the amazing stuff that a person can do for a while, but it’s amazing.

Jack Altman

If you look back at other great investments that you’ve had, do you think it’s always clear that the person’s unique to you? In the Legora situation, did something jump out faster? Or are there other situations where you don’t see it for a while? Do you always see it quickly?

Chetan Puttagunta

No, I think you see it quickly, but each person spikes differently.

Peter Fenton

Coming back to your question of whether there’s one way to succeed as an investor: God, no. In this firm, we joke: imagine two circles, entrepreneurs that I respond to, entrepreneurs Eric responds to. There’s this tiny little gray area in between with six people in the universe.

Eric Vishria

For two people who do a lot of software infrastructure, enterprise, or open source or whatever, for our Venn diagrams of entrepreneurs to be so separate is—

Jack Altman

You guys will meet a founder together and one of you will be like, “This person’s amazing,” and the other one’s like, “I don’t see it at all”?

Eric Vishria

I don’t know about that.

Peter Fenton

No, no… “I could never work with that person.”

Eric Vishria

That’s a different statement than whether they’re good or not. I think we often—

Peter Fenton

“Good for you, not for me.”

Eric Vishria

Yes. We do have that.

Peter Fenton

By the way, Bill Gurley and I had that where there’s almost no intersection. This actually relates to any entrepreneur thinking about working with a venture firm. A friend of mine was raising money, a family friend so it wasn’t appropriate for Benchmark. He asked, “How do I choose?” I said, “The question I would be asking if I was an entrepreneur is: which of these esteemed venture capitalists is most personally resonant with you and committed to you?”

They’re going to say they’re committed because they want to win. Codify it. Make them be explicit about the kind of commitment they’re going to make and make it uncomfortably concrete. With most of the entrepreneurs I work with, we speak every Friday. Make it real.

If you don’t want to put the time in, if you don’t feel that response for you with running your fund and for us individually… I knew with Max at Legora, Chetan would be 24/7. He’d fly to Stockholm on a moment’s notice, and he has. And he is today.

Eric Vishria

You’re going today?

Peter Fenton

He’s going today. So there you go. As you introspect in your commitments, does it clear that threshold for you personally? Because if it doesn’t and you’re doing it because it’s a good investment, that is a reliable path to a bad investment and a bad relationship.

I think you’re going to find… Chasing what is it that you see and then allowing that to get washed with experience… Sometimes you’re going to get it wrong. When you get it wrong, you learn. “Okay, don’t make that mistake again.” Because you’ve seen me make that mistake, and vice versa.

Jack Altman

So it’s interesting that you guys have these Venn diagrams. Let’s just say they don’t touch, to make it simple. But they’re both good. I know you both make very good investments. Is that basically because you can cultivate any set of tastes as long as it includes the good stuff? Is that basically what you shake out to?

Chetan Puttagunta

There is a lot of overlap on the people, though. If you look at the people in these Venn diagrams that the four of us have, there is overlap in that.

Eric Vishria

In the qualities of the people.

Jack Altman

Something Keith and Vinod said something interesting when I talked to them together is that they’re really different people. It’s very apparent when you talk to them. But they said one thing that they basically always agree on is: did we walk out of the meeting with a founder and was that person special or not?

I thought that was interesting because I wouldn’t have expected that out of the two of them. They’re quite different, so I would’ve thought there would be very different tastes in there. That doesn’t mean they always want to make the same investment.

Chetan Puttagunta

It’s very rare that one of us thinks a person is special and the other person thinks absolutely not.

Seeing Greatness and Avoiding Mistakes

Jack Altman

Another question I always have is: with really special people, can you miss it?

Chetan Puttagunta

Yes definitely.

Jack Altman

Is it a special ability to identify special people? Let’s take Max at Legora. Let’s say you have a hundred reasonably okay VCs who’ve been doing it for a while. Do you not think most of them would’ve come out and been like, “This guy is great”? Is it unique to be able to see greatness early, or is it more about getting into the right room with Howie and Jack Dorsey at the right time?

Eric Vishria

That’s a good question. I think most of the time people react similarly. People who are good at this will identify or see that specialness. We miss it, everybody misses it sometimes. But there’s a bigger thing that happens, which is that people talk themselves out of stuff for other reasons. The competitive situation. Can the outcome for what they’re working on be big enough? Those kinds of things.

Take Alex at Scale. You met Alex and you were like—

Jack Altman

Something’s going on.

Eric Vishria

This guy is a winner. We saw it very early. We saw it together. Those were particularly painful because we absolutely recognized that he was amazing and a super special person. We absolutely recognized that the autonomous vehicle labeling revenue was bullshit and going to go away in not that long.

So the facts and the read were correct, and the conclusion was incorrect. It’s like, “goddamnit”. That’s a particularly painful one and a good lesson for me.

Jack Altman

But you thought he was special and you passed anyway?

Eric Vishria

Yes.

Jack Altman

Have you ever passed on a special person because you didn’t like something else about the setup and still been glad you did that? Or is the lesson just always to back them if you feel that way, no matter what else?

Eric Vishria

At this particular moment in time, I would say: yes, I did. With the hindsight benefit, if you feel that way… And I think you have chemistry with the person, that’s part of it. Who do we respond to?

Peter Fenton

We’re focusing on the positive case. The negative case, which is useful also to think about—and it’s actually true if you’re an entrepreneur—is this word “inauthentic.” It’s easy over time, over many decades, to see the masks, the fakeness, the posing. If there was one trigger for all of us—and I think this is true in entrepreneurship, it’s true for the employees you’re recruiting—it’s that they think you’re faking it.

If there’s a little “fake it to you, make it” thing, put that aside. I think that’s broadly bad advice. If someone’s not willing to be vulnerable with us in the meeting and expose what they don’t know and be real, then how can we have a relationship?

There have been people who’ve come in here, who’ve done well, who’ve raised money. Particularly now in the cycle, you get people who are playing a promotional game because there’s something attractive in the external metrics. It could be a research background—pick your favorite—and they think, “Okay, we’ve got to sex that up a bit and then we’ll flip these people.”

One of the common threads in Benchmark investments is that there’s very low representation of the promoter. There are exceptions. The case where you find someone who’s really talented but they’re in the wrong market and we don’t back them but we love them, that happens.

But when we get in trouble as an industry is when we start to become quite accepting of the… Forgive me, this is the distinguishing trait between founders and entrepreneurs. In a market like the one we’re in, the number of founders increases geometrically. I think the number of entrepreneurs stays as a fixed constant. So what happens is we have a lot of founders. Anyone could be a founder. I could be a founder. You were a founder, but you’re also an entrepreneur.

Entrepreneurs have this guile. There’s a sense of leverage. Brendan at Mercor to me is an entrepreneur in any cycle, in any market. He happens to also be a founder right now. I think that’s not the case for a number of people who found companies who would otherwise, if the market was shitty, be employees at big company X, Y, or Z.

As a founder, you have to introspect. Do you have the entrepreneurial qualities? Study entrepreneurship. A vast majority of entrepreneurs drop out. The phenotype of the personalities is that they don’t want to be validated by a system they didn’t create. They’re not looking for fancy brand names and they’re not attracted to big, fancy whatever. They look for things that are substantive.

Eric Vishria

Yeah, they’re dropouts, not straight-A students.

Peter Fenton

And there are exceptions. Bret got great grades.

Eric Vishria

Bret’s in that Venn diagram, those “six people in the universe”.

Peter Fenton

This market right now, because it’s so attractive to be a founder, has brought in a degree of promotion and the sorts of stuff that get people into trouble over the mid to long term.

Our whole system is identifying and getting proximate to the entrepreneurial energies, which are, as we know, forces beyond all measure.

Chetan Puttagunta

There was a period of time between Q4 of 2022 and the end of 2023. There was a broader macro tech correction where a bunch of public tech stocks corrected. There was a tightening of the late-stage market. Interest rates were going up and all the tourist capital had fled the scene for a little bit of time. Capital just got a little bit harder to raise.

At that time, what was really interesting is if you look at all the seed and Series A deals that we did and where those companies are now, it will look like our hit rate went way up. But I actually think what happened is that if you were willing to start a company at that point in time, in AI, you were a true believer. There was some natural inspiration for what we were doing.

Think about it: Lin at Fireworks, Bret at Sierra, Harrison at LangChain. They’re companies where the entrepreneur had some fire.

Eric Vishria

God, were all those done in that era, that one year?

Chetan Puttagunta

Yeah.

Jack Altman

I think you’re right. A lot of people read it as, “What happened here is they just got to the blue ocean thing first.” Maybe there’s a degree of that. But a lot of it is that if you want to do this at a time when it looks really painful, that’s just a different subset than people who are going to do it at a time when it looks incredibly attractive.

Chetan Puttagunta

That’s right.

Peter Fenton

2008 to 2011, when we did the Series A at Uber, Instagram, Twitter—

Eric Vishria

Snapchat.

Peter Fenton

Snapchat. But then by ‘13, ‘14, it became very—

Jack Altman

It’s funny because all the think pieces and essays about this stuff are always like, “There was a new technology and on top of that new technology came ‘X’. You get cloud, you get blah blah blah.. You get mobile, you get blah blah blah. You get AI, you get blah blah blah.”

I think it’s true, but you don’t really see people talking about how in the moments when the psychology requires a different kind of hardness, it’s probably a bigger explainer.

Chetan Puttagunta

A hundred percent. And I think in that moment in time in 2022, 2023, early 2024, if you wanted to be in AI applications and AI application enablement, it actually took a special kind of person that truly believed regardless of what anybody else thought. Because at that time it was quite unpopular and weird to decide you wanted to build an AI application. The natural assumption was that fundamentally the foundation models were so powerful that as they reached more and more intelligence, they would just start to gobble up the applications themselves.

Jack Altman

Even if you look at the people who worked at the labs in the late 2010s and now you compare those people to the people who are working at the labs… Obviously, the people are brilliant now. But you look at Ilya and Greg Brockman and all these people. They were doing it when it was really not cool.

Eric Vishria

Yes.

Jack Altman

Those are still, I think, the most brilliant people.

Eric Vishria

Yes.

Chetan Puttagunta

That’s right.

Jack Altman

There’s something there.

Investing in AI

Jack Altman

The last topic I want to get to is basically how you all are thinking about AI. I realize it’s something we’ve probably all talked about a lot, but I do think it’s the most interesting thing going, and I don’t think any of us want to talk about politics right now.

Going through a lot of your recent investments, it’s actually clear that you guys caught the AI wave in a pretty substantial way. A lot of them were not obvious companies. Even Legora, which is like a middle-of-the-fairway venture type of company, was not an obvious thing to do from Sweden. There was already Harvey.

I think Manus was a very unusual investment as well. I think Cerebras is extremely interesting. Obviously Sierra was before it was happening, and when it happened, it’s like, “Wait, Bret Taylor’s doing customer support?” I don’t think you guys were loud about AI, but just empirically speaking, you look back and you caught a lot of it.

So what I’m curious about is, as you’re thinking now and looking at companies today, what are you excited about? You guys having these conversations as a partnership and being really curious. What is at the top of your curiosity list in AI right now?

Chetan Puttagunta

You just have to roll back to the end of 2022 when we happened to get involved with these spectacular entrepreneurs. The thing that became clear to us sitting around a table was that AI was the thing. Even if it wasn’t the thing, it didn’t matter. That was where we were drawn to. It was the thing that had this gravity pull for us. All we wanted to do was spend all of our time talking about it, thinking about it, meeting all the people working on it.

Then you have to overlay your value system on the thing that you’re excited by. The thing that we laid on top of that was: what kind of relationships do we want to get into with companies, in that moment in time? We decided we wanted to be in business with companies where that ethic of being the primary partner—board partner, lead investor, first investor, principal investor, principal believer in the mission—is how we wanted to practice investing in AI.

That meant we were looking for spectacular entrepreneurs with unique approaches to the market. If you want to do that in a place where you want to be the first investor and back teams with two, three, four, five people, you’re often meeting people that are probably a little bit early on whatever the next curve is.

Remember what was happening in 2022 and early 2023. Everybody wanted to start a foundational lab and everybody wanted to aggregate GPUs. There was a big drive to aggregate capital to buy GPUs that would be utilized for training runs. It wasn’t that we had some hypothesis or some macro view of why we don’t want to do that or do want to do that. We were looking for companies and entrepreneurs that resonated with us and wanted to partner with us.

In that moment, we met a lot of people that were working on really aggressive ideas. We thought they were spectacular people with spectacular approaches. As a result, you saw this list of companies that we compiled at that time. That was when we did Sierra, when we did Fireworks. We did LangChain, we did Mercor, we did Levelpath, we did Legora, Manus, et cetera.

All of that came together. When Eric did Cerebras, the Series A, it’s all of that same stuff: partnering super early with founders working on something that they’re deeply passionate about. Frankly, it’s cliché to say, but all of those investments at the time were a little bit non-consensus. I think you have to be.

Everett Randle

It’s interesting because from the outside in, before I joined Benchmark, if you look at the investments that were made in that ‘22, ‘23 time period… You had an inference cloud with Fireworks, you had a data infrastructure platform with Mercor, you had a horizontal AI play with Sierra, you had a vertical AI play with Legora. Obviously it’s only four of the ten great investments that were done in that era. It was easy to ascribe a kind of thematic nature.

Eric Vishria

Then you got here and you were like, “Oh my God!”

Everett Randle

“These guys had no idea what they were doing!”

Eric Vishria

That is correct.

Everett Randle

But you come in and you’re like, “Oh wow, they had vertical, they had horizontal, they had data. They must have done a market map.” Then you come in and start asking about each of the investments and the story behind each of them. 90% of the story on every single one of the investments is the person, the founder and the entrepreneur, and the relationship that they built and why the entrepreneur was so special.

That was so revealing to me coming into this organization and this partnership. The founder centricity just bled off the page in terms of the stories of all those investments. The way we’re approaching it today, obviously we love to talk about all of the newest and greatest things going on in AI every single week. But in terms of the actual investments, it’s always founder-centric.

It lends itself especially to this era, because the sands are shifting beneath the founder’s feet so quickly in AI and things are changing so rapidly. Founder centricity as an investment strategy matters more now than anytime in the last decade.

Eric Vishria

I agree. The underlying technology substrate is changing very quickly with AI. Any software that you could have built in 2022, you could have built in 2010, plus or minus. Once we had the cloud, we got little APIs here and there, but for the most part, for twelve years it was pretty stable. If you compare that to today, you’re getting more change every quarter than we did in a decade in terms of the substrate.

A founder’s ability to navigate that and actually understand where their edge is and where their edge is going to come from, and how quickly the moats are deteriorating—because they’re deteriorating really quickly—and how do you build the next one… It’s critical.

So I think it becomes even more important. We see all the same things. It sure feels like the infrastructure cycle is going to continue. It sure feels like five years from now, or maybe even sooner, we’re going to have really interesting things in robotics.

Everett Randle

Agents are getting really good.

Eric Vishria

Agents are going to get really good and the applications are going to get better. All these things seem really clear. But that isn’t enough to make an investment.

Jack Altman

It’s impressive to me. It would’ve been so tempting to answer my question with some high-minded thesis, and you all just said “founders.”

Peter Fenton

Also if you step back and think of these as forces, not specifically AI or social or mobile, there are windows where the disruption is so high that entrepreneurs come in and they see something with such clarity that they can’t not do it. Then there’s this lag effect where years later all the other people come in afterwards.

In a sense, that happened already with AI. It happened with the first generation. It happened with the people saying, “Okay, now we’ve got to do our model company.” But when your brother and the team of people were at OpenAI, before it was obvious, lightning struck. My belief is that it is likely to happen again at least one or two times in the AI cycle. There’s something so disruptive that no one can fully understand it. Then there’s a completely new kind of entrepreneur that emerges.

What we’ve been watching for the last three months, post-Opus 4.5, is that the force of that disruption has awakened a whole group of entrepreneurs that were otherwise not seeing things— they’re seeing them now—three months ago.

I’m a big believer in what you’re doing with Sunday and robotics, because that’s a world where we all know that in a decade we’re going to have these things in our house. But the path from here to there, is that an incumbents’ game where the big companies are going to push down complex products? Or will there be entrepreneurs?

So much of this is, where is there disruption? But then the lag effect of our industry is that 90% of the capital flows in afterwards, after the entrepreneurs have figured things out. By the time it’s figured out and there’s the next thing, it’s not for us. That’s our faith: Silicon Valley is an adaptive landscape that will continually have these disruptions. As soon as there’s a winner, we’re uninterested. We move on.

Jack Altman

It’s a great place to end. Thank you, guys. This was really fun.

Vinod Khosla and Keith Rabois are Managing Directors at Khosla Ventures.

Vinod is an entrepreneur, investor and technologist. In 2004, Vinod formed Khosla Ventures to focus on both for-profit and social impact investments that have included OpenAI, Stripe, DoorDash, Commonwealth Fusion Systems and many more. Vinod previously co-founded Daisy Systems, the first significant computer-aided design system for electrical engineers, which led to an IPO. He later went on to co-found Sun Microsystems in 1982, serving as its first chairman and CEO. After joining Kleiner Perkins Caulfield and Byers (KPCB), Vinod incubated the idea for Juniper Networks to take on Cisco System’s dominance of the router market.

Keith is also currently the CEO of OpenStore and led the first institutional investments in DoorDash, Affirm, and Faire, invested early in Stripe, and co-founded Opendoor. While a General Partner at Founders Fund, he led investments in Ramp, Trade Republic, and Aven, and before that made early personal investments in YouTube, Airbnb, Palantir, Lyft, Udemy, and Eventbrite. Keith started his career in leadership roles at PayPal and LinkedIn before becoming COO of Square.

Timestamps:
(0:00) Intro
(0:58) The working relationship
(4:26) Pie chart on what’s discussed
(7:11) Ethos of investors today vs yesterday
(10:42) Comparing FF and KV
(12:46) What makes a great founder
(22:56) Alpha in today’s market
(30:05) Themes within AI
(38:23) AI companies built differently
(46:23) Excitement outside of AI
(53:12) Politically active on X
(58:24) Evolution of political leanings

Links:
https://x.com/vkhosla
https://x.com/rabois
https://x.com/jaltma

Watch on YouTube; listen on Apple Podcasts or Spotify

Subscribe now

Clips

AI companies are built differently

I asked Keith and Vinod if they think AI companies need to be built in different ways to previous generations of startups.

“I think it’s fundamentally different.”

Harsh on X, but really nice in person

I asked Keith why he is kind of harsh online but nice in person and he just said WRONG and stared me down.

First institutional investor in OAI

Khosla doesn't get nearly enough credit for their OAI investment.

They were the only institutional investor in the first round and they made the investment that was truly hard to make when others thought it was dumb.

They aren't the type to take credit but they deserve it here.

Transcript

Disclaimer: Transcript generated with AI assistance and lightly edited for clarity and accuracy.

How Keith and Vinod Work Together

Jack Altman

Keith and Vinod, I’m incredibly excited. I got to do this with each of you individually last year. The first thing I wanted to do coming into the new year was ask the two of you to come on together. So thanks for doing it.

Keith Rabois

Pleasure to be with you.

Jack Altman

I follow both of you a lot online and watch a lot of podcasts you’ve done, and I’ve never seen you together in this kind of format. So I was really excited to set this up. One of the first things I want to get into is how the two of you work together. Because it’s rare that you have two people who are both super individually accomplished at a venture firm, working side by side. You’ve done it for many years now.

You’re obviously very different people, but there’s a lot in common. I see you as this Venn diagram with a lot in the middle, but you also have your own styles. To start, what’s the texture of your day-to-day working relationship? How do you guys operate together? How do you communicate with each other? What does it look like all the time?

Vinod Khosla

Do you want to start?

Keith Rabois

Sure. We first started working together when Vinod joined the board at Square. I learned a lot of things from him.

Vinod Khosla

Actually, Slide.

Keith Rabois

Well we worked together at Slide, but that was more intermediated through Max. I would hear about these meetings with Vinod and all these ideas and grand theories about how we should reorient the business, but it wasn’t hands-on.

I actually worked with another one of our partners, David, at Slide very directly. He told me my first revenue model was terrible. David’s a little bit of an acquired taste.

Jack Altman

Sounds like David.

Keith Rabois

His exact quote was, “This revenue plan is very mediocre.” Which turned out to be right. But while Vinod was on the board at Square, he taught me a lot of things, including the most important precept: the team you build is the company you build.

So when I was considering being a VC, it was a very natural fit because a lot of the contributions that Vinod had at Square resonated with me. I could see the style of KV and how that translated through my brain. I felt like it would be a really good pairing.

Jack Altman

What was it like for you, Vinod? When you started working with Keith, could you tell immediately that stylistically it was what you liked? How did you know?

Vinod Khosla

For me, it’s really one thing: first-principles thinking. If you can do first-principles thinking, it’s easy to know where you agree and where you disagree. It isn’t this hand-wavy thing. A, B, and C. Then we can debate those three factors, and it’s worked out very smoothly. It’s seldom that we grossly disagree. We’ll even come down to, “If these facts were true, then this is a good decision or a bad decision.”

Keith Rabois

Which is incredibly helpful. There’s one specific investment I remember last summer where I couldn’t actually decide what to do. It was close to the line, I wasn’t quite sure. And then Vinod said that the key attributes of the founder that really matter for this are, one, two, three. And then our junior colleague John Chu and I were like, “Well on those three dimensions, this founder’s A, A, A.” So it made the decision really easy because he was able to isolate the key variables for that particular company.

Jack Altman

Do you guys get into strong debates over ideas? Or have you mind-melded so hard at this point that you don’t even need to as often? Because it’s hard for me to imagine either of you shying away from debate. You’re obviously both going to say whatever you think all the time.

Keith Rabois

I think that helps, the direct style which you’ve talked about for years.

Vinod Khosla

I’ve always said I prefer brutal honesty to hypocritical politeness.

Jack Altman

I can’t imagine you dancing around a topic with each other.

Vinod Khosla

No and it doesn’t matter whether it’s internally in a debate or on Twitter. It doesn’t matter. Being very direct saves a lot of hassle. Once you have that culture, nobody’s guessing at what you think. That’s worked really well within the partnership. Nobody’s ever guessing what you think or why you think that.

Keith Rabois

Externally, I think one of the reasons why we pair well with really ambitious founders is they appreciate clear communication, succinct and direct communication. They process it extraordinarily well.

Jack Altman

If you had to guess the pie chart of the time that you guys are spending talking to each other, how much of it is about existing investments, new companies, operating the firm, anything personal?

Vinod Khosla

Nobody ever discusses operating the firm very much inside Khosla Ventures.

Jack Altman

You don’t discuss that? Interesting.

Vinod Khosla

I would guess it’s far less than 5%.

Jack Altman

Is that because it’s so clear how it works?

Keith Rabois

If you include hiring, then there’s an allocation to assessing potential people.

Jack Altman

We’ll call that separate. Out of curiosity, is that because it’s already so clear that there’s nothing left to discuss? Or is it just so much relatively less important than the work of investing itself?

Vinod Khosla

First, we have a lot more fun investing than managing. The firm doesn’t take much management, honestly, other than comp once a year and hiring, that we talk about. I can’t remember when we had a strong policy disagreement.

Keith Rabois

 At the end of the day, Vinod is energized by investing in the future through technology and founders. And I’m energized by pairing with people who want to change the world, which is roughly similar. So the management part is a distraction, to some extent, from those two core activities, which are exciting.

Vinod Khosla

Then we spend almost no time with LPs.

Jack Altman

That’s nice.

Keith Rabois

You may have to edit that. Just kidding.

Vinod Khosla

Look, I don’t mind. I spend less time with LPs than almost any other senior partner.  I think that’s generally true of all the senior partners at Khosla.

Jack Altman

Well you’re at a place where you probably don’t need to spend that much.

Vinod Khosla

Frankly, entrepreneurs are a lot of fun to work with.

The Khosla Ventures Philosophy

Jack Altman

So are you spending most of your time talking about new companies, existing companies? Is that basically all of it?

Keith Rabois

Actually both. We take the current portfolio very seriously. Every single Monday meeting starts with the current portfolio before we ever talk about a new opportunity, because we’re in the build-a-company business. That’s what we focus on. We’re an investor, we’re going to be a partner for 10-20 years. How do we help the company achieve its highest ambition and potential? So we literally start intentionally that way with the portfolio before looking elsewhere.

Vinod Khosla

The funny thing is, in the 40 years that I’ve done venture capital, I’ve not once called myself a venture capitalist or an investor. I always say I’m a venture assistant to entrepreneurs trying to build companies. That’s what our website is focused on. That’s what we talk about mostly internally, how do we help a company change its trajectory, if the potential exists to change it?

Jack Altman

How differently do you see today the ethos of new young investors, versus when you were getting started? Because right now it is such a thing.

Vinod Khosla

Young and old doesn’t matter as much. What matters is, have you built companies and earned the right to advise an entrepreneur? I think most people who advise entrepreneurs haven’t earned the right to advise an entrepreneur.

Almost all the senior partners in our firm have earned the right by helping build a company, being inside a company, and having empathy for the founder. So I think that’s a pretty distinctive feature of how we think of our role. A lot of firms just want to be nice to founders and it hurts the founder.

It’s like saying yes to your kids all the time, no matter what they want. You want them to know you love them, but you’re trying to get them to be the best they can be. That includes pushing them to be the best they can be. I think we both agree our business is much more about helping the entrepreneur build a successful company than about investing.

Jack Altman

I’m newer to this obviously, but it seems like there was some moment in time where the dominant marketing strategy for VC firms flipped towards just being extremely founder friendly, whatever that means. I don’t know if that was 10 years ago or 15. But it was something like that. You guys probably experienced this going through being on one side of it and then the other. I kind of almost lived in that world. But was there a moment or a period of a few years where it just became the strategy for some reason for VCs to go full founder friendly?

Vinod Khosla

Our goal has always been what’s good for the company, not what sounds good or what will get us more referrals for the founder next time. I think this hypocritical politeness, which is pervasive in our business, is really bad for founders. When a founder selects for that, they’re generally a weak founder.

Strong founders almost always select for the best feedback they can get. They also know how to say, “No thank you. I disagree with you.” I think that’s a really important characteristic. One of my favorite thing is… There are two founders who did something called founderschoicevc.com. It was some survey of founders.

What I love is that they wanted to avoid the hypocritical politeness. So they said that only the VCs that you’ve worked with you can vote on, the VC firms. And you can’t say, “We have these three investors. They’re all great.” They forced them to rate them head to head, like a chess Elo rating. I’m very proud that we are at the top of that list among 400 VC firms and hundreds and hundreds of voters.

I think it’s the most important survey for me, to know that in retrospect our founders prefer us. And we prefer backing the same founders again and again. Our LP decks always have a huge component of how many repeat founders have come back to us to work with us.

Jack Altman

Keith, I’m actually really curious because obviously Founders Fund is an amazing firm as well as Khosla Ventures, and the ethos is the same in the sense of wanting to do what’s right for the company. But I think the pathway to get there is the opposite in some sense.

Keith Rabois

The goal of finding bold, ambitious founders and companies is very similar. I think the way we actually practice what we do is very different. Our craft is to be the partner in building the company. I look at my role as being the consigliere to the founder. Sometimes the consigliere tells you that’s a bad idea, and sometimes they tell you that’s a great idea. Then they help the principal, and they’re not confused about who’s the CEO and who’s the consigliere. That’s how I think of my role.

Founders Fund thinks their role is to provide the capital and get out of the way. And if you have an idea where they might be helpful, please call, and we’ll do everything we can to try to help. Proactive versus reactive.

Vinod Khosla

That’s exactly right. Very similar goals, betting on really bold ideas whether they’re popular or not, whether they’re on trend or not. They’ve done an incredible job of that and we like to think we do that also.

Jack Altman

You can imagine how the conversation would play out. On one side it’s, “we should back entrepreneurs that don’t need help.” Then the other side of the conversation it’d be “yeah, but even amazing people can still be helped. Even the best baseball player has a coach.”

Keith Rabois

Yes, even the best best ball players have coaches.

Jack Altman

I knew it, I was going to use sports for you.

Keith Rabois

Or they have shooting coaches even, or fitness coaches. There’s almost no profession where the best at what they do don’t have an advisor, coach, mentor.

Vinod Khosla

Take a really strong founder, like Max Levchin. I’ve never been on the board. The company’s gone public. We’ve distributed, a great outcome. We were the first investors. To this day, Max and I do quarterly phone calls because he wants my help and advice and second opinion on something he’s thinking about. I’m always looking for areas I’ll prod him in to think harder, like “you’re ignoring this or that.”

Identifying Great Founders

Jack Altman

I want to talk about clicking into the source of great founders and great companies. Obviously that’s the center of the work. I posted that I was going to have you guys on the podcast. Somebody said they wanted to hear about this, but Keith, that you can’t say the thing about comparative advantages and you’re like, “but it’s true.” And I think it is true.

But I want to try to click in, as closely as possible, to what makes a great founder. One of the things that stuck with me was you both have said that you guys are basically always aligned on the read of the founder. You might disagree on a market or if this is a business you want to be in, but more or less, you think the same thing about if a person is a great founder.

Keith Rabois

Very rarely is there significant divergence on the assessment of the founder. I can probably name two, three examples in eight years.

Jack Altman

What specifics can you describe?

Keith Rabois

I’ll give you my formula and feel free to edit. Mine is one of two traits. One, I meet a founder and in some dimension they’re the best I’ve ever met in my life. They can be different. They can be the smartest person, they can be the most tenacious person. They can be the best assessor of people. They can be the most strategic. It’s just, “oh my God, top one basis point on some dimension.”

We do mostly first institutional capital, we want to be as bold and as early as possible. What I’m trying to find out is, is there a non-zero chance this person can change a vertical or the world? That’s really it. One of those two things.

99% of humanity is not going to change and reinvent an entire industry, let alone the world. So what’s the probability? Usually the people who succeed have some trait where, oh my god, your ears perk up.

The other exception is that they have a Venn diagram overlap of traits that you don’t see in common. For example, with Max Levchin, I’ve talked about this before. Literally, when I met him in December 2000, Reid Hoffman came up to me and said, “you’re getting ready for your first one-on-one with Max. Max is a first-rate technologist and a first-rate business mind. There’s fewer than five people in all of Silicon Valley that are that.” Reid was dead on. 25 years later, it’s still true. There’s fewer than five people and Max is one of them, and that’s led to his trajectory.

Jack Dorsey, whom we’ve both worked with, is actually a pretty damn good design mind, pretty good technologist, and a very good business strategist. He has three, which is also why he’s been very successful.

Jack Altman

So somebody that you trust refers someone, you’re going to meet them. You’re in the meeting with them for an hour. Are you trying to pull that out in that meeting? Is this work happening outside the meeting?

Keith Rabois

It usually is so strong that it shows up in three minutes. Literally you meet someone who’s the smartest person ever and you just feel this energy.

Jack Altman

Aren’t there some less obvious traits than super smart though, like grit or something like that?

Keith Rabois

Yes, there are. For example, one of my favorite gritty founders told me the story of when he was working at Uber. His team in this foreign country that he just joined—because he was a launcher—was going to run a triathlon on Saturday. And this is Thursday. He’s like, “I want to be part of this team, I want to fit in, I’m going to do it.”

He hadn’t trained at all and didn’t own a bike. So what did he do? He rented a Citi Bike and did the triathlon on a Citi Bike. That shows so much grit. That’s all you need to hear.

Then his co-founder finished second in the spelling bee when he was in high school and passed out due to stress. So he didn’t quit his senior year. He went back and tried to win it. I was like, “there’s a dimension there that you don’t hear very often.”

Jack Altman

So to get some of these ones that don’t show up in a live meeting, do you have certain things that you’re prodding towards? Are you asking more about life than business? Or are you just free flowing and seeing what comes up?

Keith Rabois

No, I actually don’t do the Doug Leone/Daniel Gross-style thing where it’s “tell me about your history and your siblings.” It does work. For those people, it definitely does.

Jack Altman

Have you tried it?

Keith Rabois

It’s usually, “tell them about your company and why you’re doing this company.” And it just shows up somewhere. There’s just a spark, they can’t help themselves.

Jack Altman

Have you tried the Doug Leone thing and it just didn’t work for you?

Keith Rabois

I never really tried it. It’s like when you assess people. Vinod’s been interviewing executive candidates for literally 40 years for companies. There’s a mechanical way of doing an interview where you go experience by experience. Why’d you leave VP of sales? What did you accomplish? What was the biggest challenge? What are people going to say about you?

Then there’s a different way where you interview people that’s a bit more freeform. I’m definitely in the freeform version of the interview.

Jack Altman

Do you do a founder meeting similar to that? Or is it a whole different thing for a founder?

Vinod Khosla

Every situation’s different. I want to add a couple of other things to what Keith said. I think the most important thing is exceptionality in some dimension, whether they’re going to be a good CEO or not. But related to that are two things. In the areas where they’re not good, it’s perfectly good to back a founder if they don’t know an area. Often it’s a professor or something. That’s where the venture assistance comes in that I was talking about, where we can help them be a complete founder.

But also the thing I want to emphasize is, to me what’s key is the learning rate of the founder: how open-minded they are to new ideas and how good they are at rejecting bad ideas. Too many founders just take every idea and try and execute. If a person listens to me all the time, I’ll almost never invest with them because I know they’re not critically examining.

I often take positions I don’t believe in just to test how the founder’s thinking about something. I have a document I put out, it’s a public document on how to do an interview. It is very much freeform. Everybody knows what answers to give in an interview. So how do you get past that? I have an internal document I give only to our founders on how to interpret the answers they get. If I put it out publicly, then every candidate would understand how I’m interpreting so I can’t put that out publicly.

But the first half, I made it public. Here’s how I assess somebody. I have a pretty clear style. It’s usually about putting people in a situation they haven’t been in. It’s not a soft, “tell me about your life history,” because people know how to storytell, and the best storytellers may not be the best candidates.

So you have to get past the obvious answers. “I did this in that company” or “I opposed that, in retrospect”. I think it’s very nuanced. So that’s a great example and ties back to “the team you build is the company you build, not the plan you make.” Because the right team will evolve the plan to the right thing and your initial plan is seldom the right plan.

But if you can help pick the right team in a new context—which is that you’re trying to do something bold and different—that’s a pretty critical part of it. So it’s both part of what we can do to help a founder and why most people are not qualified to even interview candidates. I’ve seen such bad specs for what the company needs. Most of the time they’re wrong on what a company needs to hire.

Keith Rabois

You have a great example in marketing specifically where you talk a lot about the zero-to-n marketing versus.

Vinod Khosla

Most startups are trying to create a brand. If you’ve been marketing at Cisco, you know nothing about creating a brand. You know how to incrementally sustain a brand. That’s a very different skillset.

Jack Altman

I was going to say something even worse than that. How to make this quarter’s number look a certain way so that your manager—

Vinod Khosla

I got in trouble for saying that if you’re at Cisco for more than 10 years, you’re not qualified for a real job in the entrepreneurial world.

Keith Rabois

It’s not Cisco specifically.

Jack Altman

They’re just so different. They have nothing to do with each other.

Keith Rabois

You have to find the dimensions that lead to success for what the startup needs. Then how do you find that trait or that proven ability and make sure there’s a Venn diagram overlap there? First it’s diagnosis and then assessment.

Vinod Khosla

This is the kind of place where venture firms are pretty different. We’ll agree if somebody can advise somebody on marketing, but if you look at a spec a board will put out, it’ll be cookie-cutter, “Get somebody from ‘X’ related business.” It’s just a terrible idea.

Jack Altman

It’s actually a source of a lot of management mistakes, which is that it has to look good on LinkedIn for the board and that’s a disaster.

Keith Rabois

Worst thing ever.

Jack Altman

And it’s really hard if you’re a young founder to stand up to that and the board’s confident.

Keith Rabois

This is the role of a really good advisor or board member. Sometimes just giving the founder confidence—

Jack Altman

Permission to trust their own gut.

Keith Rabois

Just saying, “You’re not wrong.” Just saying that when they’re getting a lot of pressure from somewhere else, especially for a first-time founder. Just saying, “No, you’re probably more likely right, actually.” Then all their instincts kick in and they have enough confidence to just say no.

Jack Altman

Outside of this idea of exceptionalism and finding this dimension of special, basically what you’re saying is if somebody’s B+ at everything, that’s not a good investment for you.

Keith Rabois

Usually an A+ and incomplete. Vinod likes the term incomplete. A+ and incomplete is a really good formulation. The rate of growth is hard to tell in your first meeting. That is one of the hardest things, because you have one dot. Geometry, you can draw a number of lines through one dot.

Jack Altman

What do you do about that? Do you try to go historically?

Keith Rabois

The best thing is you know someone over time. The reality is—

Vinod Khosla

Let me interrupt with my favorite example. For YC founders, the most important question I can ask the partner who’s working with the company is, how much have they learned in the last three months? Three months is enough to tell if they have a high learning rate or not.

Jack Altman

I guess in a fast-moving process, all you can do is basically try to get a data point from the past.

Keith Rabois

Yeah. Once in a while you can try to get data points from external people, but most people have the wrong prism. Unless you ask the question perfectly, unless you can really retrain their eyes, it doesn’t help.

Vinod Khosla

But there’s other ways. Imagine you were in this business that you’re not familiar with. How would you go about learning X or Y? Putting them out of context and having them think through, it’s very easy to tell.

One of my favorite questions… It doesn’t matter whether they’re doing a startup or not. Let’s say they’re a candidate for a marketing job. If I gave you a seed amount of funding to investigate three ideas, which three would you pick? How would you go about evaluating them over the next six months? It’s a pretty simple test. You can tell a lot about a person just based on how they answer that question.

Jack Altman

That’s good. Are there any things that a founder can’t be completely deficient in?

Vinod Khosla

Ethics. No question.

Jack Altman

How do you figure that one out?

Vinod Khosla

Mostly through references.

Jack Altman

Even on that point, a lot of people that seem not so friendly are actually very ethical. I’ve noticed that a lot of the highly disagreeable, intense founders actually have a very strong moral compass.

Vinod Khosla

Yes. That is absolutely true. Because they believe in their principles.

Jack Altman

And it’s the source of both. That’s interesting.

Vinod Khosla

You’ve seen this in the Valley. We were talking about this earlier. People have changed their political affiliation at a whim, not stayed with what they really believe in.

Jack Altman

Yep. We’re definitely coming back to politics in a little bit. I have a lot there. Is there anything around ability to recruit?

Keith Rabois

Ability to recruit is a very important dimension. Can you envision this person hiring the first hundred people? The first hundred are really critical, because those people are going to replicate themselves. Patrick Collison talks about this at length. The first 10 are going to multiply by 10.

Jack Altman

You can imagine somebody who’s really exceptional in some dimension, but you just don’t think they could recruit well.

Keith Rabois

Right, but then the question is, can they parlay whatever unique assets they have into convincing people to work with them? Sometimes they can actually, even if they’re very uneven. Or you can help them. You can help them communicate. Why is this ambition worth chasing? What kind of people do you want? But their energy or their special secret sauce comes through. Let’s say I set you up to interview one of these great founders. I think you would pick up on the fact that this person’s kind of unique, even if you couldn’t articulate the exact reason.

Jack Altman

You just come out feeling that way.

Keith Rabois

You come out feeling like, “wow, that was interesting.” At a minimum, that was interesting.

Jack Altman

One of the things I often think about is that somebody who is good at selling anybody is on some level good at selling everybody around. It’s the same person who can convince candidates and investors and customers and all of it. It all does bundle together.

Keith Rabois

You definitely have to be able to tell a story. At the end of the day, you have to convince people. You haven’t proven almost anything usually in the beginning. You’ve got to convince people to come along on the journey with you. Those are investors, early beta/alpha customers, employees. You have to retain your employees in a hot market. You’re doing some version of that constantly.

Jack Altman

Look back at a bunch of the greatest investments over the last 15 years or so, Airbnb or whatever. There’s a bunch of companies that were not hot early and everybody passed. Is that still the case, do you think? Has the consensus become more accurate? Or is it still the case that it’s random signal?

Keith Rabois

I don’t think it’s random at all, by the way. For example, let’s talk about Airbnb. To me it was obvious three minutes into Brian’s monologue. I was like, “this is the coolest thing since YouTube.” I literally told him this, told him exactly why. It was so obvious to me I needed to meet him. I didn’t like the “air bed and breakfast” name that they were using at the time so I kept rescheduling the meeting, which was a very costly decision for me.

But at the end of the day, if you met Brian for three minutes, there was no way of missing that this team was very special and he was able to convey three key things he said in the three minutes that made me like, “oh my God, this is really amazing.”

Jack Altman

You saw it but most people didn’t.

Keith Rabois

Yeah but I’m saying it’s not random. You saw OpenAI, a company we all know. The key investment decision… Literally, if you read our memo—which we sent to the LPs because it was so much of an outlier at the time—outside Google and DeepMind specifically, this was the only critical density of research-grade people that could possibly pull off AI. That was the investment hypothesis in a rough sentence.

Vinod Khosla

And given all the other stuff—it was a nonprofit, there was no product plan, no revenue plan, just this AI capability—it’s the only time in the 20-year history of Khosla Ventures we sent an apology letter to our LPs when we made the investment. Because it was twice the largest initial investment we’d ever made. We sent an apology letter: “I know it makes no sense, but we are doing it anyway.” Not asking for permission. That letter’s now part of our fundraising deck. We sent it in 2018.

Keith Rabois

Here’s a good example too of rate of growth. It did help a lot that David, me, and Vinod all knew Sam for a long time, over a sustained period of time. So you could see certain lines there. The critical density of talent that he assembled, plus certain traits about Sam specifically, led to that investment.

Jack Altman

As time has gone on and more people are in tech and there’s more founders and more investors, not from people who can really see it but from the average reception to investors, do you think that the consensus hot deal is becoming any more or less likely over time…

Keith Rabois

At seed? I don’t think so.

Jack Altman

You think it’s still the case that these hot seeds are no better than the non-consensus seeds?

Keith Rabois

In my personal opinion?

Vinod Khosla

I agree totally.

Keith Rabois

Rocket Lab was one of the best investments anywhere. I don’t think they would’ve raised money from anybody.

Vinod Khosla

It’s worth $40 billion now. We bought a third of the company for $5 million because nobody wanted to invest in space. Or Commonwealth Fusion, or even OpenAI. We were the only venture investor in 2018 that committed, because it didn’t make sense. I think at the seed level, consensus hot bets are generally around people, not around the idea.

Jack Altman

If you have two people who left, pick your super hot current company… Let’s say an engineer and a designer leave Cursor tomorrow. What’s that going to go at?

Keith Rabois

A lot. But a seed investment around undiscovered people, I think the consensus ones aren’t going to outperform the outliers at all.

AI Investment Landscape

Jack Altman

Maybe just talk about themes that you guys are interested in. I know that you’re mostly focused on people, but you also care a lot about markets and technologies. Maybe start with AI and then we can go outside of AI. Obviously AI is in the midst of playing out. I don’t know what inning it’s in, but it’s probably one of the early ones.

I think there’ve been a lot of changes to what the labs say that they’re focused on. Maybe the types of companies that are getting funded are adjusting a little bit, if you track it every six months or so. I’m curious what you guys see as the lay of the land outside the labs, where you think most of the opportunity lives, what you’re most interested in, what you think is going to be a big deal in the next year or two.

Vinod Khosla

That’s such a broad surface. I think I was counting this. There’s 30-some startups in our portfolio that are building an AI worker of some sort: AI oncologists, AI mental health therapists, AI chip designer, AI structural engineer. As many professions as there are, there’s that many opportunities.

Jack Altman

Basically to fully do the work.

Vinod Khosla

Do the work. One thing we decided a couple of years ago, probably three years ago, we wouldn’t do a lot of copilots. Copilot had just come out and we said, “Copilots, humans get in the way. Let’s just do the work.” So we love people doing the work as opposed to helping a human do the work. Now there’s exceptions to that, but mostly that’s true. That’s a big category. We haven’t invested in any competitor to OpenAI, obviously.

We should come back and talk about it. We are fiercely loyal to our companies. We can talk about loyalty. With OpenAI, I think I was the very first one when Sam got fired to come out and say, “We’ll fund Sam for whatever he wants to do next.”

Jack Altman

The loyalty, does that stem from a business decision or idea, or does it stem from, “this is how it ought to be”? Is it more of an ethics kind of thing?

Vinod Khosla

This is how it should be. It’s about ethics. If I disagree with an entrepreneur, then my job is to sit down, tell them why, and agree that we agree or disagree before taking the right position publicly.

Keith Rabois

If we believe, on the principles, that you’re on the right side, then we’re willing to use our brand capital and audience to help.

Vinod Khosla

Along the AI question you were asking, we’ve invested a bunch in other approaches than transformer models that make sense. We probably have four or five different efforts. They don’t have to replace transformer models. But they’re different because I think the big labs are doing transformer models really well and then doing some other things.

Jack Altman

So what else do you think is promising?

Vinod Khosla

It’s too early to tell. I think any of us who pretend we know this technique or that… We have a bet on neurosymbolic techniques, we have a bet on category theory in math, we have a bet on interpretability that leads to different models, we have diffusion models. There’s plenty of others. I’m very excited about real-world models.

Jack Altman

I was just going to ask you that.

Vinod Khosla

I think that game hasn’t played out yet. It is not clear at all who will win. It’s very clear what the major labs will do in that area, and at least the major labs all have efforts. But I think it’s completely up for grabs.

Jack Altman

And you have no doubt it’s going to work. It’s just a matter of how.

Vinod Khosla

I have zero doubt it’ll work and work increasingly well.

Jack Altman

And it’ll be embodied robots.

Vinod Khosla

It’ll be embodied and more than that. Understanding the physical world… Let me give you an example. This is a public clip we showed. Intuition is a very big deal, and I don’t think current models embody intuition.

So we have a company called General Intuition, based on gaming data. I saw a clip of this. It was a live feed of Ukrainian soldiers trying to escape Russian attackers. We gave the AI half the clip and said, “Replicate the other half.” It replicated the intuition of the Ukrainian soldiers trying to escape almost identically. That’s intuition. There’s many dimensions like that.

But there’s many obvious ones. We all talk about the fact that frontier models hallucinate and there’s probably not a good way to avoid them. There’s ways to minimize them, and the labs will do a pretty good job. But you see the hot agents startups like Sierra and Decagon, they’re completely, I think, missing the point.

We’ve focused on customer support agents that do not hallucinate. If you’re a bank, if you’re a Visa or MasterCard or insurance company, you can’t afford to hallucinate an answer, even if it’s a low percentage. We’ve heard a lot about mental health therapy where bots take people down untoward paths. Those are all examples. So I think the winning customer support thing will be something that does not hallucinate for a class of applications. With some applications some hallucination is fine.

Jack Altman

Are you saying that you think a company can’t just increment its way from hallucinating sometimes to hallucinating never? Those companies can’t just improve their way to no hallucination?

Vinod Khosla

It’s possible, but I think if you architect for low hallucination, know when to use “no hallucination” when you can afford to. Giving somebody’s bank balance, you better not ever hallucinate. I think it’s pretty important to look beyond normal. Lots of people will do the normal extensions of LLMs to lots of applications. It’s a massive market. Lots of people will do it. Every area will have 10 startups.

Jack Altman

Keith, are you interested in hard tech as much, or do you invest more in B2B typically?

Keith Rabois

I’ve invested a lot in AI.

Vinod Khosla

I love your quote about AI and how you’d have done it differently if you hadn’t joined Khosla Ventures.

Keith Rabois

Before I joined KV—I literally rejoined two years ago, basically this week—I had literally invested in zero AI companies before. Since then, in the last two years, I’d say about 70% of my investments have been AI. Had I not rejoined KV, I think I either would have missed the whole wave and been completely irrelevant, or been reckless. Neither one’s good.

What I was able to do when I joined is learn by osmosis. I’d sit in partner meetings and 80% of the companies that we would discuss, in the portfolio or new opportunities, would be AI-based. I would listen and learn. As I started meeting founders, who were interested in AI that fit my normal standards, I could send the deck to three people here—Vinod, Sven, and John Chu, and sometimes Kanu too—get feedback and then actually often have some combination, maybe all four, meet the team.

So when I first started making AI investments, I felt like I had this air cover. They could understand A) how good is the team B) how smart is their approach, how differentiated is their approach? And C) is there anything else in the landscape that’s even better? That allowed me to start making new investments. You then develop some taste and some ideas about what works. You join the board of the companies and you learn how these companies are built and what works, what doesn’t, what are problems, what are not. So now I basically do all AI.

Jack Altman

On the topic of how companies are built, obviously you’re super involved with company building, you’ve built companies yourself a bunch, and it’s something that you talk about a lot. Do you think AI companies are built in any substantially different way?

Keith Rabois

I think it is fundamentally different. First of all, they are growing at rates that are unprecedented in the history of technology. To me, it’s a little bit like running the four-minute mile. Once you see someone run the four-minute mile, then no company should have an excuse for not growing rapidly.

You see all these enterprise companies going from zero to $50 million. You start asking questions. Why can’t you, at least what are the limiting factors? There sometimes are real reasons, but you start with the question of why not? Why not? Versus, oh, that’s impossible.

If you had said we’re going to start a company and have $10 million of revenue in year one from launch, 10 years ago all of us would’ve said that’s impossible. Definitely not the right answer. Now it doesn’t mean every company should do that, but it’s an open question.

Then the question is, what do you do about that? Borrowing from Peter Fenton here, the idea of PMs does not make sense in a rapidly emerging technology field. What do PMs do? They go talk to customers and they create a sequential roadmap over the next four months. If the field’s evolving and the capabilities are evolving—literally every month there’s papers published, you probably read papers every week, let alone things that are launched live—you can’t have a 12-month roadmap. That makes no sense. So you have to rethink that.

Then also, how does sales work with your research team? OpenAI actually pairs, as far as I can tell, the people doing customer acquisition with the research team. That’s a completely different model than how most technology companies were built.

Compensation—this is in the public domain—it’s completely different. People haven’t even thought through the implications. There are so many companies like Meta that can afford, because of how they mint money, or Google because of how they mint money, to pay salaries that only professional athletes could aspire to when we were growing up.

However, if you’re starting, how you can afford that level of cash compensation when you’re not minting money—

Jack Altman

You can’t, right?

Keith Rabois

Well, you still have to compete with people who can.

Jack Altman

Doesn’t that go to your “diamonds in the rough” type of idea?

Keith Rabois

That’s one possible solution. Or you’ve got to hire people that don’t care about short-term cash comp and have a different missionary zeal or different orientation. Or you’ve got to take a lot of money from somewhere else that you’re not paying for. But very few people have thought through company building from scratch if you need research-grade talent and you have to compete with the market. How do you reorient the entire P&L of a company?

It depends on what you’re trying to do. It depends on what market you’re in and who you’re competing with and how much cutting-edge AI talent you need. Do you need one person? Do you need a team of 10? Those are all very different. There’s a lot of financial consequences to those.

Jack Altman

Let’s say somebody is building a new AI-centric system of record or something like that. How different do the first 30 hires look like? Could you guess what you think that might approximately look like?

Vinod Khosla

I think it’s very different. First, the whole idea of systems of record is going to change pretty dramatically. It may be that the old systems of record don’t go away, but the operating substrate is wholly different. In fact, most likely that’ll be the case.

Take ERP, a hot area. It’s really becoming unbundled. There’s procurement and then there’s finance. You can go through the various modules in an ERP system. If you don’t have the right substrate to have it operate under an agent architecture, you’re not going to have huge success.

It used to be that in the ERP system it’s, what features does it have? I’m a manufacturer, do I have manufacturing features? I think now it’s about how do I reduce the number of people I need in accounting or supply chain or others. One of my favorite examples, we invested in DualEntry. They have a client called Slash that does small business lending. It’s a complex business. It’s both regulatorily complex, and you have credit scoring and all those complex areas. $150 million ARR company with only one person in accounting. That was my reference when we invested. Why? Because the architecture’s right.

By the way, these aren’t founders who are credentialed. I think they’re from Venezuela. Really great people, love entrepreneurs. That was number one, we loved the entrepreneurs. Loved the architecture, loved the impact. The benefit is very different from a feature list.

Jack Altman

Here’s another difference. For example, if you traditionally built an ERP-ish system of record or whatever, you think your defensibility would be around the number of integrations you would do. Think Rippling. We have all these integrations, blah, blah, blah, and it creates a big moat. With things like Cognition Devin, doing a hundred integrations is something you could actually feasibly do in a month at very low marginal cost.

Jack Altman

Totally. A company like MuleSoft makes no sense now.

Keith Rabois

Exactly. So a lot of these incumbents are much more vulnerable, I suspect.

Jack Altman

Given that you’ve got all these different intentions for the company, the way success is measured, the way you build a company, the old playbooks, to whatever extent those ever were any good, are definitely no good now. Have you found that retraining, for lack of a better word, experienced execs who came up in pre-AI ports over well? Do you have to be more cautious with that as you’re bringing in higher execs into new companies?

Keith Rabois

I think it’s fun and challenging. I’ll give you a good example. One of the best companies ever is going to be Ramp, but Ramp started in the pre-AI era. We’re very AI-forward. We’ve talked about this publicly, there are stats about it. We’re leaning in, we’re hiring AI-native people constantly. We have the best intern pool on the planet for the last three or four years in a row.

But we actually have to rethink the company because we really started in 2019. So we have a lot of things that were based on doing the best possible version of a technology company in 2019. That’s changing. It’s an interesting board-level conversation that we have of, “wow, should we rip up everything we’ve learned, or which pieces should we rip up so that we can be the best company in the next 10 years?” If Ramp’s doing that, imagine what every other company should be thinking.

Vinod Khosla

Here’s my way of explaining this. Most experts are experts in a previous version of the world, not the one you’re trying to create. So fast learning, and I come back to that, is much more important than lots of experience in this AI world. How you do anything—computer architecture, system integrations, marketing, customer support—all that is so radically different. You want rapid learners, whether they’re experienced or fresh.

Keith Rabois

Let me give you a mundane example. Think Lattice back in the old days. Right now in enterprise, because of the hype of AI, top-down sales can work extremely well. The CEOs feel pressure from their board to be AI-forward. Their executives feel pressure to be leaning into AI.

Historically, it’s not the best way to build a company, to depend upon top-down CEO sales. But it actually does work in certain verticals right now extremely well. So the whole go-to-market playbook, you have to rethink too.

Jack Altman

It’s funny, like in legal or a couple other categories, they just want to buy AI even more than what the specific solution is. It’s like, “we have a big budget for AI.”

Keith Rabois

In the short term, they have the budget. They may not care about the impact. In the long term it’ll harmonize. You have to produce results ultimately. We care about that. We evaluate it. When we look at application-level companies, the actual impact you’re driving for your customers is a key input.

Jack Altman

But I assume if you have a founder you love and there’s this crazy market pull, even if they haven’t worked out all the pieces yet, that’s a good enough starting point to bet on.

Keith Rabois

If they really understand that they need to, versus just chase revenue.

Other Investment Areas

Jack Altman

You said 70% is AI, so there’s other stuff you guys are interested in. We talked about robotics last year.

Vinod Khosla

Robotics is AI. We’re pretty big on robotics.

Keith Rabois

One thing people know less about us—but we’ve been consistently excellent at it across the history of the fund—is in financial services. We have this point we make to LPs that in every single fund we’ve had, we’ve returned the fund solely on one financial services investment. So we love things like Square, Stripe, Affirm, just as examples in the modern stuff.

Vinod Khosla

First investors in all of those, except Stripe where we were second.

Keith Rabois

We have Aven, which is a very excellent company.

Vinod Khosla

It’ll be the next surprise Stripe.

Keith Rabois

Upstart was incredibly successful. We did some of the seed and led the A.

Jack Altman

Has finance gotten less AI-ified than other areas?

Keith Rabois

People are using it maybe not as strategically yet.

Jack Altman

You think it’s because people are a little scared, or rightfully scared? Because I do feel that the fintech companies of the last era seem more insulated from the AI wave and threats. I haven’t seen as many—

Keith Rabois

Some of it is hallucination concerns.

Vinod Khosla

Aven is a good example of a company that’s deeply using AI in every aspect of it. That’s why you can get a home equity line of credit and consolidate all your credit cards onto a new credit card that has a 10 points lower interest rate.

Jack Altman

Then they have your credit card.

Vinod Khosla

They issue a credit card based on your whole home equity line of credit. They can get it done in an hour. Normally that’s weeks and weeks.

Jack Altman

AI is what makes it possible to go so fast, which makes it fit in the right way into the process.

Keith Rabois

And Ramp’s using AI very aggressively, but I think it hasn’t been quite as transformative across the broader sector.

Vinod Khosla

The thing is, there aren’t too many great fintech companies. I would venture to guess Ramp and Aven will end up being two of the best of the new breed started in the last five years.

Keith Rabois

I agree with that. So that may be true. Once every so often there’s an amazing fintech opportunity, at least in the United States. There’s been Nubank and a company in Germany, Trade Republic. They’re awesome. Revolut. But in the United States it’s once every two or three years at most that you have a true iconic company—

Vinod Khosla

That can get to tens of billions or $50 billion or a $100 billion market cap. There’s not that often. So I do think the next generation will use AI in a very significant way.

So fintech’s a really interesting area. We still do a lot of sustainability stuff. I’m really bullish on energy. We are very bullish that that area will keep sustaining. By the way, manufacturing is another area we haven’t talked about. It’s a huge interest for us. Defense is another huge interest.

Jack Altman

What in manufacturing?

Vinod Khosla

Applying AI to completely change the paradigm of how manufacturing is done. As part of that you can onshore stuff that was offshore. So it’s these two trends colliding.

Jack Altman

Is robotics part of that too?

Vinod Khosla

It is part of that. It’s not the most essential part.

Jack Altman

What’s essential?

Vinod Khosla

Essentially reducing labor costs in other ways. Not by a robot doing the job, but running a system in a way… An iPhone assembly line would have a few thousand manufacturing engineers. If you can do that function with AI, then you have a pretty large advantage manufacturing onshore.

Jack Altman

How much of the opportunity is that the points of creation of goods versus the operations and logistics around a manufacturing company?

Vinod Khosla

Both. We are seeing both. Supply chain was a minor part of all ERP, we talked about that. There’s going to be lots of opportunities to replace supply chain software with new AI software.

Jack Altman

Then in defense, obviously with Anduril, SpaceX, there’s huge inroads here. Is your guys’ sense that there’s a lot more opportunity for those flavors of companies to be built? Will those companies dominate in their markets? How do you think about how those markets will play out?

Vinod Khosla

I think there’s room for lots of new startups. We are big investors in Hermeus. That was not started in the current fashion. It was started five years ago to do hypersonic aircraft. I think that’ll be an important part of national defense. It’ll become even more prominent because Russia has used hypersonic missiles in Ukraine and we don’t have any. So that’s an important area we did a while ago. There are many other areas. Keith, you can talk about Mach and some of the others.

Keith Rabois

We’ve been concerned geopolitically about the threat posed by our adversaries, the CCP, etc. Vinod got involved in The Hill & Valley Forum before it was cool. He was one of the first 20 people when it was sitting up to alert—

Vinod Khosla

By the way, under a Democratic administration because it was a common concern.

Keith Rabois

The country needs to take advantage of the best and brightest in technology and cutting-edge technology, or we are going to sacrifice our way of living to people who do. We started investing in things like that ahead of the curve. There’s now more interest among VCs because some companies are perceived to be doing quite well.

VCs are always like a herd. But we invested in Varda, which has a significant defense component. Mach Industries is a very high potential company.

Vinod Khosla

Rocket Lab many years ago.

Keith Rabois

All of these were before it was “cool”. Now the country needs to take advantage of technology. The country has more threats and more potential adversaries to worry about. It has to do it with less money. It has to survive or thrive with less money.

Technology is a great magic wand. It has been for consumers for 40 years. You get more for less. The government needs to embrace that. This administration is putting people like Emil in place, hopefully to catalyze a new world order where we take advantage of technology and make America better.

Politics

Jack Altman

On politics, both of you are pretty willing to get into politics stuff on Twitter/X. You have very different politics obviously.

You both are willing to just get into, I don’t want to say “fights”, but fights on X about politics and stuff. It clearly comes from strongly believing in what you think. Why spend the cycles on it?

Keith Rabois

I’ll give you my answer. I don’t actually know yours. Through technology, I developed a following. I woke up one day and said, “I don’t want to die one day and regret that I didn’t use my audience to proselytize about ideas and things that I find important.”

So if I can surface new ideas or rebut bad ideas, I want to finish my life thinking I did the best I could to have influence and have a platform. So I started using it that way, particularly on topics related to politics. I was just like, “I don’t want to regret having not tried to change people’s opinion”.

Jack Altman

Are you stressed at all? When you’re getting into it on X with somebody, are you feeling anything about it or are you just, “oh, I’m just saying what I think”?

Keith Rabois

There’s times when I wish I had more time to research, if I didn’t have a day job. I know how to construct an argument, I know where all the evidence is. There’s a time when I don’t have time to go do that. My friend David Sacks back in the day hired a research assistant secretly to help him. I don’t have time to do that.

So there’s times when I happen to know the answer. I used to be very involved in politics, I know a lot of details. But I do wish sometimes that, if I wasn’t doing a real job, I would be spending more care and marshaling more evidence, and probably be more effective.

Jack Altman

One other bit that I’m now curious to ask about because I think it’s funny, is that you’re kind of harsh on Twitter, but you’re really friendly in person. Is that just how you write, or do you mean to? Are you doing it for the bit?

Keith Rabois

I also have this crazy idea. This is a dumb idea. A decade ago, I was like, I’m going to combat every bad idea on the internet with the worst idea. If someone puts a bad idea or something wrong, false out there, and nobody responds, people think it’s true. LLMs are going to pick it up and think it’s true. I’m just going to respond so at least there’s a written record. But there’s so many bad ideas and dumb ideas in the world that this is like the worst idea I’ve ever had in my life. You get addicted to trying to fix every mistake on the internet.

Jack Altman

I like the ones where you don’t even explain what the problem is. You’re just like “Wrong.”

Keith Rabois

That was a funny Square joke. It was an old Square joke. We had this critic at Square named Rakesh and he used to just constantly complain about Square. It was never going to be successful and he knew payments for 20 years. He’s a canonical expert in payments. So sometimes I’d engage and write back substantively, but sometimes he’d be so far off, I’d just write “Wrong.” So it became this internal Square joke and it became a meme. That’s where it started.

Jack Altman

That’s good. Why are you motivated to get into it online?

Vinod Khosla

I don’t spend very much time. On all of social media I probably spend less than an hour a week. So if I incidentally run into something that is blatantly wrong, then I’ll express an opinion. But I won’t even have the time to read the replies.

Jack Altman

So if you’re fighting with somebody on X about whatever and you’re getting all these replies, you’re not bothered?

Vinod Khosla

I’m not bothered. But if something’s an important idea or something… Usually it’s some principle somebody’s violating. Like this weekend I happened to run into a tweet by Bill Ackman that was sucking up to Trump on capping interest rates at 10%. He’s sort of recommending that idea and then saying, “Maybe there’s a market approach”, hedging the truth. He’s clearly a market person.

So I replied to him pretty bluntly. I like Bill, he’s a good guy. I know him. But I just couldn’t let that pass, sucking up to Trump on a truly bad idea of capping interest rates. It’s almost like Trump and Kamala Harris would have the same idea: price controls. Come on, speak up! Don’t be dishonest about your opinion and he was being dishonest. So when it bothers me, I reply. But I don’t spend a lot of time and I don’t have a lot of time otherwise.

Keith Rabois

I do it mostly when I’m in an Uber. You know you have these moments where it’s really hard to be effective. I just use it as a snack while I’m in an Uber ride, I’m not going to be able to schedule a call while I’m in an Uber ride. So I—

Jack Altman

Get on there and dunk on someone?

Keith Rabois

The worst is when I do it when I’m eating, which is a bad habit truthfully. I’m having breakfast and I’m on Twitter or something.

But when I started, it was actually a business reason. I was kind of famous back in the day at Square. I read every single tweet, every single day, about Square for years. Because occasionally you’d see a gem. It’s either a great story that you could re-share, a positive experience like “you helped my life” and you get this great anecdote. Or you’d see a customer complaint and you could route it directly to someone. Or you’d see a product feature. So I literally started every single day reading everything. But then that gets you in this trained habit of having to read everything. Maybe not the best.

Jack Altman

10 years ago maybe, you were one of the first vocal conservatives.

Keith Rabois

Maybe the only one.

Jack Altman

Maybe the only. I think now you’re maybe one of the only vocal, at least liberal-leaning—

Vinod Khosla

I’m an independent for the record. I’ve never been a Democrat.

Jack Altman

So what was the political journey?

Vinod Khosla

I used to be a lifelong Republican over fiscal issues and switched to independent over climate issues. I’ve stuck with that pretty consistently. Principles matter a lot. My fight against Trump is his values. He has none. We can disagree, or he tries to go to extremes to get his constituency rallied around him. Either way, I don’t like the idea that people don’t mind lying about things.

Jack Altman

When you watch that and it’s violating your principles… You’re seeing everybody around you. What is your assessment or read on the situation? Obviously 10 years ago this wouldn’t have been the dynamic and it all flipped.

Vinod Khosla

Clearly people have changed their affiliation for convenience. Doing things for convenience is a bad idea. Now I realize some CEOs have responsibilities to others other than themselves. Some will just change political affiliations, and if the next president is Bernie Sanders, they’ll become liberal again. That I hate.

Keith Rabois

I agree. By the way, I don’t like the convenience. I believe in principles. A reasonable fraction of people, I think that’s true. Then I think there are some who just watched the evidence of a lot of things the last administration did badly and jeopardized the country in some ways. Then some things that Trump has done have clearly worked or seem to be working at least. And for some people, it is fine to change your mind based upon evidence.

I would say there’s an element of convenience too. There’s probably a mix. It’s hard to sometimes know who’s who and what camp and all that stuff. Then there are some who have customers and employees that they have to represent, absolutely. That’s an important consideration. So for example, if you have significant government contracting revenue, you do have to think that. You’re fueling your families, your employees’ families. There are real responsibilities.

Vinod Khosla

There are responsibilities. You see them from a number of companies where they clearly, fundamentally haven’t changed their principles, but they have to take the responsibility of the role or get out of the role.

Jack Altman

It’s also interesting because it’s new for tech to even care, or for it to even be reasonable for tech to care, about politics. It just didn’t matter in the past. Also it was not possible. Tech was much more monoculture on the left before. There also just weren’t government-related tech startups.

Keith Rabois

Some of it is that the government has found tech much more interesting for a variety of good and bad reasons probably. You could argue that the best thing ever was that tech was built mostly on the West Coast, far away from Washington. It allowed tech to thrive and invent itself without a lot of scrutiny. Because generally speaking, government scrutiny early in emerging technologies is not a good thing.

Jack Altman

This is why I’m afraid of AI regulation. What are the odds of getting it right? It just seems hard to do.

Keith Rabois

I think that’s a real risk with emerging technologies. The government is less likely to be right than wrong on something that’s rapidly emerging. Maybe when something stabilizes, the government might have a better predictive accuracy record or something.

Jack Altman

You obviously need regulation at some point in these journeys.

Keith Rabois

But then you also have to think about the rest of the world. Vinod, even though he’s probably a little bit more pro-regulation generally speaking than I am, has been very concerned about losing AI to China and what that would mean for this country. If you have a threat, you have to think very carefully about regulating a new technology if you know a very serious adversary is putting the pedal down and isn’t constraining itself.

Jack Altman

They’re really good at robotics, they’re really good at manufacturing.

Keith Rabois

They’re really, really good at robotics.

Vinod Khosla

Look, it’s very clear. Four years ago at The Hill & Valley Forum I talked about how we are in a techno-economic battle with China. We must do everything to win and everything we can to disadvantage them. It’s just the truth.

Jack Altman

What does that look like? What needs to happen there?

Vinod Khosla

I think too much regulation in AI would be a really bad thing. State-level regulation is a horrendous idea.

Jack Altman

Just generally?

Vinod Khosla

They just don’t understand the global implications. Not everybody abides by American rules. The Chinese for sure don’t. So I think we have to be realistic and pragmatic about what battle we are in. Over the next 10-15 years, economic superiority is up for grabs and we’ve got to win or we’ll live under President Xi’s rules.

Jack Altman

Obviously you’ve talked about this a lot too, the China stuff.

Keith Rabois

It was a bipartisan effort four or five years ago, and fortunately it was very effective. It started changing people’s minds. There were a lot of people that were very naive about the threat five years ago. There’s still debate about whether we should export this chip or that chip, what the restrictions should be on different technologies. There’s a lot of nuance to this, but at least the central idea that we just cannot lose this race for AI is pretty mainstream now.

Jack Altman

It’s part of why a lot of the America-centric companies and investment firms are really resonant for people. People want to work at those. There is a growing patriotism out of necessity.

I have a final question for you, Vinod. Did you see the report that Keith went to Barry’s 2,000 times last year?

Vinod Khosla

Too many times.

Keith Rabois

It’s only 430 a year. The interesting thing about it is, literally this morning I went to Barry’s at 7:10 AM and a founder comes up to me after class and says, “Nice to meet you.” I was like, “what do you do?” He said, “I run an AI company detecting cancer, funded by a16z.” I was like, “that’s cool, that’s interesting. Who knows if one day we’ll invest or whatever.”

But he said, “thank you so much” and I said, “what are you talking about?” He said, “I started getting myself in shape by going to Barry’s because I read about you doing it.” So you changed someone’s life indirectly through that, that’s actually really rewarding.

Jack Altman

It’s a bit much, but it’s good.

Keith Rabois

That was just this morning.

Jack Altman

That’s great. Alright you guys, thank you very much for doing this. I had a great time. Really appreciate it.