Ep10. Pre-IPO Market, AI Hype Cycle, Is Software Dead? | BG2 with Bill Gurley & Brad Gerstner

0:00 there is absolutely no doubt in my mind that excess Capital distorts company Behavior okay and in particularly these early phases it's very difficult it's not impossible but it's very difficult to stay fit and efficient when you have a buffet of all options sitting in front of you and you can fund all of them scarcity breeds necessity scarcity breeds Innovation so I think if you're on the board of a company or founder of a company or CEO of a company you have

0:31 to think long and hard about the negative cultural and negative fundamental effects to your business of taking too much Capital hey man good to see you happy Saturday pod good to see you sir what's been on your mind well look I mean so much has happened and I think took a few weeks off so like it almost feels like

1:04 the the world has changed dramatically from from when we last talked so there's a bunch of different things in my mind I've been thinking a lot about the I'll call it the the pre-ipo market I don't know why I don't want to call it late stage because I think some of the money has moved down to companies that are even pre-revenue but the the preo market I think is changing dramatically I think there's always this interesting question of of

1:30 where are we in terms of reality and perception on the whatever the newest trend is and you know we've seen that with other things like crypto and whatnot and I think it's interesting to think about that relative to Ai and then and then lastly one one topic I really want to get your opinion on after some of the earnings releases since we last talked in the software category in particularly people have thrown out this question like is software as we know it

2:02 dead which is obviously overly provocative but but there are a lot of questions around that and a few people weigh in and I'd love so anyway I'd love to talk about all three of those things if you're up for it well no doubt about it and sounds like we have our agenda but but before we jump in I I have to say you know I was driving in this morning and I don't know I'm just reflective in a reflective place I mean

2:27 my oldest son Lincoln turned 16 this week and my mother turned 88 and it's just a moment just a moment my mom sent me this note well she actually sent it to all the kids and I just I have to read a bit of it because it goes to how I'm thinking about things and she's 88 right so she starts by saying I was born on this day in 1936 right between the Great Depression and World War

2:52 II times were tough we didn't have much but we shared what little we had does that sound bad nope these have been the best 88 years possible to be alive sure I've seen lots of bad stuff assassinations bad politicians and Wars lots of Wars but the good outweighs the bad by a long shot just think about what I've seen the first TVs the first commercial flights the first computers the first mobile phones and Google and

3:23 now even chat gbt the world's gotten better in almost every way we live longer and healthier we solved problems we could never have dreamed of and we're all more connected I wish people weren't so negative let me tell you the struggles of no food or housing in the Great Depression or being shipped off to W 18 knowing you wouldn't come home that is hardship but the truth is I understand people feeling overwhelmed by all the hustle and bustle today I too have a

3:54 LoveHate relationship with technology myself while I know it's made the world better I didn't realize how lucky I was to grow up in small town America at a quieter time it was a simple life long walks and card games fewer friends but you shared everything so enjoy your technology but never let it Rob you of the Personal Touch it's a tool to use you should run it don't let it run you but never turn against progress because

4:23 without it we go backwards and personally I can't wait to see what comes next that from like an 88-year-old woman woman I mean I was so blown away by just that perspective yeah her optimism and just like the framing of her life it really was like all the Innovation we've seen like it compressed into such a short period of time and so I know today we're going to you know talk a bunch about where markets are

4:53 going and his software dead and where are we in the age of AI but I it just caused me to think we live at such a unique moment in human history I mean I think you would agree just innovation of All Sorts it's raging at a pace that you and I have never seen and it's not an accident you know like there's been all this attack on capitalism and free enterprise you know over the last few

5:19 years but it is in fact that system that and a direct result of that system that inspires and incentivizes people to dream and build this stuff and you know I was looking at the Starship launch this week which just just this insane feed of human engineering I mean in four launches right we now had a soft Landing in the ocean this is a ship that nobody thought was ever achievable it's going to make us a multiplanetary species and

5:49 I saw the looks of exhilaration on the faces of those young people in you know the control center and I just told my kids when we were watching that I just said find something in life that makes you feel that way right and I think that may be elon's frankly greatest Legacy is just the motivation the inspiration he's giving to all the generations that are coming up right to dream big to think big to build stuff that matters I think that

6:21 was only half of your mother's message by the way yeah I mean like you know I I I think it was the part to me that really inspires me and motivates me and you know I'll get off the soap box but you know as we start diving in here the one thing I'm I'm just thinking a lot about is we as a we as a country need to make sure we don't screw this up it's the

6:46 system that's creating all that prosperity it's the system that's creating you know the advances in biology the advances in Space the advances in Ai and certainly they'll have challenges but it's an extraordinary time to be out here in Silicon Valley doing what we do so well and I I would I you know adding on top of that something we talked about one of our first episodes was that Reagan speech that he gave and one of the

7:13 reasons why the US has been so successful is open skilled immigration and getting the best people in the world to come practice their craft here and why we have limited that and not Advanced it is shocking to me and there will be ramifications because the technology allows those people to stay in other places if they so choose so you got to make it easy for them yeah no doubt about it here here why don't we jump into I guess the first topic you

7:44 know about this new reality in the late stage Market why don't you take us through what What's pequ your interest there so let me walk you through this and you and I have talked about in the past but I think I think I've come around to A New Perspective so I've lived through two different major Cycles Venture Cycles and you know I've watched there be high periods of liquidity where a ton of returns are made 99 kind of 2021 even kind of

8:14 0708 and then frequently on the downside like 01 you just see a wash out right and I've seen people completely cleared out yeah and and I've often thought about their changes to the venture that are systematic like increas in competition has been completely linear and systematic since I joined but other things are cyclical and they come and go and I think I had always thought that the presence of large amounts of money presumably easy to get in the priv

8:47 late in the late well we say late stage but it's come so early I don't think that's the right word but the the large let's just say large round private Market I I've I've come to believe that that it may be a systematic Trend and not a cyclical one and there was a mini correction I think you have to call it a mini correction in inventure in 2022 2023 a lot of companies did layoffs you had right sizing you a lot of talk

9:18 about free cash flow and profitability but then the AI wave came and and and then the a AWA got so big right what's AI as the percentage of venture capital right now 50% at least yes and so and that market is behaving almost like it was prior to this mini correction and so if I I look around and and at some of these data points so there was an ft article since you and I talked last that

9:50 someone aggregated the cumulative losses in in the food delivery business at20 billion you know and that's just not your grandfather's Venture Capital industry that's something new there are four companies in the coding co-pilot space that are not named Microsoft that have raised over $200 million each and we're just these companies are all of a year and a half old right so it's just a different world

10:22 I look at someone posted the just the investment Sequoia has made in elon's companies and they were rounds that were in the you know 500 600 million range and there were three or four of them and once again just not not the historic Venture Capital model and lots of money lots of you know you're in this world so don't don't take this the wrong way but like these people are getting two

10:52 and 20 to write a check for three or $400 million and not take a board seat and if for the for the listeners who may not know that two represents an annual management fee not not a one-time management fee and it's taken generally over seven you know seven to eight years so that could be 10% of that money so they're get although I would point I would point out bill I think on some of those very large multi-billion dollar

11:19 rounds where the investment size is multi-billions I think there are creative F fee structures I think what's more what's more standard is like zero and 10 I've heard I've heard I've heard I heard those things changing yeah yeah fair enough I think that I think that's a fair point but but I guess my my my point is I think this is more permanent I think it would take a massive ShakeOut like a Gargantua o 01 style or

11:48 or more to change this at this point well I to I mean listen I totally agree with you in fact you know you and I have talked about this for well over a decade you know in fact part of the reason I started ultimeter and part of our thesis in 2005 is we thought companies would stay private longer more of the value capture would occur in the private markets because they would scale faster now at the time we thought it was

12:10 because they would also be more Capital efficient right think Google raising less than $40 million pre IPO but you you know I think a lot of this has to do with the function of changing Market structure both technology the way it scales regulation making it less desirable to go public and frankly the development right the market development responding to that is just a much deeper and much more liquid pool of capital for companies that choose to stay private so

12:38 you know if I I I pull pull up a couple charts here but let's let's let's ground it in some facts over the last 10 years there's no doubt there's been more multi-stage funds larger fund sizes right and this accelerates the trend because you no longer have to tap the public markets so if you look at this chart it just shows you the share private cap Capital that was raised by the large funds and that's just becoming

13:03 a much much bigger part of the total market and what I think is particularly interesting about that it said through Q2 2024 521 private Market funds have raised a total of 295 billion across these asset classes but fund counts fell by 45% during that same period of time right so yes this is the case that there is a structural and dynamic change in these markets you got these multi-stage

13:33 funds you got funds like altimer that's been doing this for a long time where we you know we do early all the way through public markets and that's the amount of capital that's been raised and then Bill if you look at the amount of capital that's been deployed and where that's coming from you can pull up this chart from crunch base and it also shows you right that you just have a lot of these late stage dollars now what this chart

13:57 doesn't show you is the valuation of the rounds when they were getting done so I think you're exactly right there and then of course this isn't just VC and growth funds anymore we have worldclass sovereigns that have moved into this domain you could see here you know this new fund out of Abu Dhabi mgx which is run by frankly extraordinary investors long-term time Horizons aligned with national Sovereign interests and it's not just them right the Saudis the Kuwait 0s and then

14:29 don't forget we've also seen the private wealth the high net worth platforms move into this space so gold M saxs JP Morgan Morgan Stanley those platforms are now aggregating and put big dollars into the space so the most fascinating part of this is that we do now in my estimation I think this has been the case for quite a long time we have the permanent emergence of what I've been calling the Quasi public market right right and the reason I call

15:00 it the Quasi Public Market is because VC has a certain connotation to it right you're taking that first second third round of risk into a company you often own somewhere between 7 and 20% of a company you take a board seat you actively engage and help build that Company Success that's very different than investing in a company at 10 20 $30 billion that frankly is in a very different place in its life cycle often times so you know I don't know I look at

15:32 that and if if I ask the question is that good or bad I don't know more liquidity allows guys like Elon to better experiment to take bigger swings of the bat maybe it it compresses the margins for those of us in the investing business but I think it leads ultimately to a lot more Innovation although I'm sensitive to the point you put out there you know it's just two two or three years ago where we were talking about

15:58 right the soft Bank effect weapons of economic you know destruction you know we certainly led to excess competition in the ride sharing space and so what it did is it slowed down and prevented the natural order of things the 8020 the winner take most from developing in a profitable way and once that Capital dried up a bit Bill obviously you saw the profitability of uber Skyrocket and the natural kind of Market structure set in so I do think that's a Down side

16:29 of this but net Ned I think it's a positive development for entrepreneurs and Innovation yeah I I could I could I could certainly express some things that I that I worry about that are not necessarily in the best interest of the entrepreneur or the investor so one just with this much money being pushed upon you and if you don't take it your competitor will take it you're forced into the game like you're not allowed to not play so that is that what is is that

16:59 what you feel like happened between Uber and Lyft sure sure absolutely but but there are many examples I mean I I think that come me I'm on the back on the board of Zillow was forced into the this home purchasing Market because the open door team raised so much money and was going to tell the world that that that they're going to be Obsolete and so if you you know if you don't engage you you could have multiple compression on your

17:28 head like like the there it's just it's it's an interesting Dynamic anyway you're going to have higher burn rates and so you're going to know less about your unit economics just by a natural fact because you get further away when you're operating that way and you can't raise $400 million and not have a high burn rate like there's no point in it like unless you just like interest income the the the staying private longer thing becomes both the dog and the tail like

17:57 it's hard to know which which causing which right because once the investors want and this is true of founder liquidity and and employees secondaries also once the the the people want to bring the money to you especially preemptive rounds this kind of thing you start searching for ways to make it easy for that round to take place and so you start encouraging staying private longer you start encouraging the secondaries

18:28 and that create a misalignment of Interest let let us not forget that the bird founder took out 50 million in in a private round you know and that company's now bankrupt right and well I I I definitely there are two things two features of this that worry me there is absolutely no doubt in my mind that excess Capital distorts company Behavior okay and in particularly these early phases it's very difficult it's not impossible but it's very difficult to

19:00 stay fit and efficient when you have a buffet of all options sitting in front of you and you can fund all of them scarcity breeds necessi scarcity breeds Innovation so I think if you're on the board of a company or founder of a company or CEO of a company you have to think long and hard about the negative cultural and negative fundamental effects to your business of taking too much capital I mean we saw this song and

19:26 verse over the period 2008 18 to 2022 and frankly we're still moving through the hangover of it bill yeah and state private longer can become State private forever which has a negative impact on irr and eventual liquidity and if you've taken there there's another element of this that's going to bring the Regulators in and Lord knows what they'll do but it'll probably mess it up is that if this sector of growth has

19:57 been stolen from the public markets by the Quasi Public Market as you call it then the people in Congress will cry foul that the individual investor doesn't have an opportunity to play and and they'll start and they'll start doing stuff that will cause more chaos I'm sure well I'm sympathetic to the argument you and I have discussed this many time the number of public companies in the US has collapsed the whole idea of accredited investor status that you

20:28 have have a certain amount of money in order to be deemed worthy to invest in you know in private companies and if they stay private until they're worth $100 billion dollar or you know take open AI like there are a lot of retail investors that would love to buy open AI today and the only ones who can fundamentally who can really access it are accredit investors High net worth investors so it is then you have to know

20:50 someone like there's no and it doesn't matter but you say we're making the same point but I would say again at least the companies that we're involved in we have these conversations very openly with the founders about the risk-reward and the tradeoffs I do think there is a lot of these pressures you know that that that you rightfully acknowledge but ultimately it seems to me like as to this question whether or not this is going to yield good

21:20 results right I think it's I net net I think it's generally deeper liquid more liquid markets generally a positive for the entrepreneurs and the founders and I think for the firms listen late stage private deals you know like let's go back to think Groupon I think the last private round there was 19 billion and two years later it's worth 1 billion this comes down to stock selection this comes down to investing comes down to your underwriting comes

21:49 down to risk reward I might think that open AI at $90 billion is an incredible risk reward and wish that I had more money in open AI at that value ation Others May think that's ludicrous that's called a market right and you're going to be proven right or wrong in the fullness of time and frankly Bill to your point about 2 and 20 LPS get to decide if you go out and you want to raise money from them you want to raise

22:14 billions in order to put billions in open AI they get to ultimately decide what they're willing to pay and you know again they're going to probably be held accountable at some point in time for their returns Al that that can take a very very long time as you know that could be a 10 to 15 year window before like Corrections in the lp Market are are one of the slowest things that can possibly happen and and I'll close this

22:38 part by acknowledging something that you've said before which is and and and I've talked about in other places but the the some of this and the reason it's systematic and not cyclical is just a recognition that when technology companies gain a foothold and have positive momentum they often go much further and longer and higher and they have Network effects and so this is some of this at least is the the the market coming to grips with that and

23:07 recognizing that you can pay 30 or 40 times revenue for something if it's going to hyper growth for four or five years because of systematic advantages and and adjusting their game on the field as a result I blame a fair bit of that on you I mean you're you educ you educating everybody on power law and network effects over the last 15 years has helped our plight at all I mean the competition is stiff I think that the

23:32 efficiency of the late stage private Market you know it it's no longer five or six players in that market as you know you're talking 20 30 40 players you know that will will show up to these things so it's difficult and I know I I stress about this all the time we're going to be judged ultimately by the returns on that capital and I think the folks who are deploying that capital for the most part are are are

23:59 are pretty extraordinary and worthy competitors and we end up frankly these big rounds often times are collaborations between many firms much as you've seen in private Equity develop over the years but one of the things I did want to touch on you you you raised this question like how much of this has gone into you know generative Ai and how is this skewing it yeah and so we have a couple charts here I think Sapphire Ventures you know put these charts

24:22 together and it just shows like you know the vast majority of money I think it AI funding 2023 Forex you know 28 billion in over 700 deals but what is interesting is about 65% of that talking about power LW 65% of that I think went into five or six companies you know that you know of and by the way those companies need big checks because they're consuming voracious amounts of capital and you know perhaps such a jumping off point

24:53 although some of some of this may involve these credit deals some of this count sure for sure and and listen that's another thing one has to take into account when thinking about these valuations but I know that you have a little bit of Ang based on prior pattern recognition just about you know whether this is developing to into a bit of a hype cycle so why don't you talk to us about your thoughts about what's going

25:16 on look I think it unquestionably is in a hype cycle and by hype I don't mean negative necessarily just that everyone's talking about it there's there's not a CEO or a CIO in in our in the US or probably around the world that hasn't asked the question what are we doing in AI you know how can it impact our business like it is on the tips of everybody's tongues right and so when you get in these situations I'm always

25:48 like I don't know why but I'm always fascinated with what's reality and whether we might go too far and what we're promising versus what what can actually be done I think in this case because some of the the leaders and and I'd say opena is probably the strongest are willing to spout Hyperbole and and what I mean by hyperbole is they're willing to just State really vague broad big ideas without much meat on them and

26:21 and that and I think that then creates a situation where you you I think you end up having tension in the system where some people feel like their own business model is threatened by this notion especially if the notion goes too far there was this super interesting comment made by the new chairman of tsmc where he said open AI Sam Alman is too aggressive for me to believe now why do why would he go out and say that out

26:47 loud like like you know what's his incentive and I would say his incentive is he's running a business he's got people asking him questions all the time about where this business bus is going how's it going to be and there's this other person running around the globe telling everyone everything including spreading rumors that he's going to spend a 100 billion of Microsoft's money and he's going to build his own chips and build his own Fabs and and and that

27:14 then starts to be distracting to a company like TS yeah but hey I you know like let let me take the other side of it right I'm sure you would so no I mean I'm I'm just saying you know Elon set out of vision for rockets that could land themselves and auto fleets that would be replaced by electric cars at the time he said these things they sounded totally outlandish and by the way the time took longer to get to most

27:40 of these points than Elon envisioned but we ultimately got there and It ultimately blew our socks off and I think two of the things you have to do right you have to will the future you have to manifest the future you have to describe the future you have to motivate your employees and importantly you have to motivate sources of capital right and so I think in the case of Sam you know he's out there saying these things and

28:03 again I don't I don't need to come to his his defense I think he's incredibly thoughtful I think he is a True Believer as I am a believer I don't know what the time series is going to be and I'm certain all of these experiments will not work with that said if I am the CEO of tsmc I would say exactly what he did the reason I would say it is because if Sam's going to emerge as competition

28:26 build his own Fab build his own own ship Etc what would I want to do I would want to undermine the sources of capital so that he can't become competition I would I would to say to the sovereigns who are thinking about funding him whoa you better be careful because this guy is too aggressive this is part of the war of words that we see out there all the time I mean data bricks does this in an

28:48 incredibly Ali is is is amazing against against snowflake I see this happen in in VC land all the time where people will say something to try to freeze the market so a company doesn't get funed you know a company doesn't get funded so so all I would say is that it may in fact be very shrewd by Sam to be doing exactly what he's doing I don't think that necessarily undermines the advances that we're making although I

29:18 would say that we're in the fog of War right now and it's very hard to know the time scale that a lot of these things will unfold I would so so you use maybe like Elon in the Tesla example you know I think another example is crypto right and so we went through a phase where there were very very smart people you know on podcasts like this and and around the globe saying that crypto and blockchain would replace the corporate

29:48 entity like and that Marketplace companies like uber wouldn't exist and all this stuff like and that just didn't play out and right I don't think it's going to you know yeah go out go out on a limb and so but for a while we all believed it there was a moment in time where the scooter companies were claiming that they were going to take 75% of Uber's rids that did not happen there hardly anyone riding them here in

30:19 Austin and so it's we sometimes you're right sometimes you are you know drawing a picture of the future that we actually get to and sometimes that doesn't play out so you know I there's more meat on the bone here to be fair but when you say this stuff will do anything and everything when you say for sure my computer when it's not summarizing my email will be curing cancer and when you start talking about Ubi and how no one's

30:48 G to work like I just think that's like La La Land Stu and and lots of people are saying it lots of people are saying you know no listen I think I think here's where I think your admonition is is smart and as you know we've looked at a lot of stuff at altimeter in the AI landscape you know enabling Technologies infrastructure picks and shovels for all the all the reasons about uncertainty and high valuations a lot of

31:15 valuations reflect or discount or underwrite high levels of certainty right that I think are hard to Peg at this moment in time this is what I think happens in the fog of War right and the goal of an analyst is to develop deep conviction at these moments in time and be right before everybody else does right I think about this in the internet people had deep conviction it was going to be huge that search was going to be

31:40 important but a lot of people ran out and invested in Ash cheeves and and altav Vista and lios and excite and name all the companies that a few years later would go to zero and it's almost certain that that will also happen in AI that didn't mean that the internet wasn't going to be huge or that Google wasn't going to be a Trill multi-trillion dollar company which I also think will happen here but the go ahead well I

32:05 just think this is so I I wanted to do this one before the software one because I think they're relevant to one another so there are people that believe that that Ai and when they say that I can't I never know whether they're talking about AI or llms which I view as a very small subset of AI but will just do everything it's just going to do everything and so this this our last topic about the these people have come

32:36 out and said well because of what you saw in the earnings period and how the stocks reacted software is dead and so there are people that believe one day you'll just tell your llm what you want it to do and it'll do everything that software did right that's that's a pretty strong form of it I think there's a lesser strong form of it that the UI around llms are going to enable a type of interaction with what we used to

33:06 think of as a SAS application that's going to make the older apps feel tedious and therefore you end up with a replacement cycle maybe maybe as big as SAS replacing on Prim maybe as big as as SAS replacing client server or whatever came before or mini and main frame and if you believe that you know how much of how much of this gets Rewritten so you've invested in so many software companies you guys are deep in your

33:37 analytics what did you see in the past three weeks from earnings and how do you think about AI as a risk for multiple compression and disruption for the software industry R written LS yeah no I think it's super important question just just by way of trans transtion to that I did want to say this thing that not everybody is all in on AI you know I'm going to WWDC at Apple tomorrow and

34:07 you know Apple intelligence is out this morning talking about AI service that they're going to unveil right they have not spent tens of billions of dollars building llms or Frontier models and there are some people who are critical of that bill and I imagine they're looking at it and saying we don't see the industrial logic we don't see the return it's no you know it's known to be a very financially and fiscally conservative company and so they'll probably announce

34:33 a partnership with open AI my sense is they probably look at that and say oh that's a transition for us let them spend all the huge early dollars we'll come in and be a late mover we'll spend a fraction of the money and ultimately we control the platform we control the the the the device and so we we're not at risk of getting disintermediated my point is that I think there are different choices being made by

34:57 different companies let's but that said using the Apple example I do think that the heat is so loud even on this very podcast we go what are they doing why haven't they made Siri better like and like the drum beat gets to the point if they were to hold that tomorrow and not mention AI which they would never do it would raise immense questions no that's for sure of course not why would they but I think they're going to have a series of

35:26 announcements you know in terms of integrating with open AI they're going to make the the the phone better they're going to say you can only get it on 15 plus or 16 they'll drive a replacement cycle in two you know that begins in 2025 but they won't spend the dollars to have their own solution probably until you get in to the release cycle at the end of 25 and I think that's a perfectly acceptable solution listen if

35:50 everybody was critical of them bill for not building their own llm everybody knows they have not yet and so if people were critical of them the stock wouldn't be at1 96 bucks a share right people are voting with their wallets and saying listen it seems like a pretty good balance between the choices that you've had in fact I think if people are going to be critical of anything a lot of people are looking at the total capex

36:10 of the hyperscalers now at $200 billion and saying when are you going to get a return on the dollars that you're spending and how on Earth can you go up from there and have the industrial logic to earn a return since you mentioned the hyperscalers there was a series of lay announced in two of them I think it was Google and Azure was it or Amazon I think they were small targeted what do you why why if if you're in just hyper

36:41 growth mode why are you doing layoffs I don't understand well I I I mean listen look at the most recently reported number of employees at meta everybody knows that zck in beast mode around Ai and yet when he reduced the headcount from 86,000 to 69,000 and a couple years ago I think at the end of the most recent quarter he still only had 69,4 there's massive slack in these businesses Bill if they weren't firing people or encouraging them was in the

37:09 unit specific to this which was confusing to me anyway I I think it's I think it's a good sign out of those guys but let's go into let's unpack the software stuff that you led us to and and what I want to start off by saying is you know like there's a lot to unpack but let's start with the obvious right when when the future gets less predictable right for any reason whether it's macro whether it's micro then you have to

37:35 increase the discount rate in your free cash flow and your DCF right and that means that multiples go down slowing growth also reduces multiples and then we've talked a lot about how high interest rates higher than expected reduces multiples right so this is the triple whammy The Perfect Storm for software multiples is right now because we've had slowing growth we have a lot more uncertainty about the future irrespective of what side you're on and on top of that interest rates have have

38:06 remained higher than expected this year and we were starting from historical highs during Zer so let's take a look right this is the chart a lot of people have seen and this is made by our team and it just shows you where we are in the historical context of forward Revenue multiples right and so we're trading you know about 20% below the 10-year average exco and some people are starting to view that as an opportunity because when you see headlines that all

38:35 software is dead if you don't believe that to be true and you see these valuations then you say to yourself I need to go hunting and I'll tell you there is smart smart money that's starting to buy software again you see this next chart which was by Goldman Sachs and it just shows us a multiple of free cash flow so similar to the Chart above but what what did we hear in the quarter Bill okay so uip paath came

39:01 out and said their grow slowed down to 6% sales force came out said their growth slowed down to 7% and I think for a company like snowflake it it came in at 26% and and and data bricks is rumored to still be growing well in excess of 50% okay but I pulled some Snippets that we could throw up on the screen here that we got from from the commentary right workday said we saw probably a bit

39:27 more scrutiny than we seen this time last year I just think people have taken a little bit of a pause Salesforce the momentum we saw in Q4 moderated in q1 and we saw elongated deal Cycles right so deal compression and high levels of budget scrutiny uip path in mid-march we began seeing increased deal scrutiny and longer sales cycle with large multi-year deals right so multiples in all of them have compressed

39:58 and and you know one of the things I think about is public markets when they hear things like that they shoot now and ask questions later whereas Dr and Miller likes to say invest and then investigate and so if you look at the forward free cash flow multiples on these business you know uip path is now trading at something like 20 times and snowflake at 36 times if you look at their revenue multiples 4X and 9x

40:23 respectively on 2025 so those are a hell of a a lot lower than what we saw over the past few years but the question really is what does this all mean for the future of growth for the future of profitability of these businesses and can you plausibly see you know is the core business going to be attacked or do you see use cases where AI is actually going to be an accelerate to to the business let's take those one at a time

40:50 so I would I I would make the argument that the pressure and and I I I say this without judging it as positive or negative the pressure to be completely focused on AI at the CEO level and the CIO level is so high right now from every from everywhere picking up the Wall Street Journal on reading it watching CNBC listening to us whatever that they have to spend or they feel they have to spend

41:20 and we'll post a link to this survey a CIO survey that battery Ventures published but what you see is let I think 8% of cios have a budget increase over 10% so 92% don't so think fixed you know near fixed budget but 85% of them say they're aggressively increasing their spend on AI right so this you know by definition it's got to come out of something it's got to come from something right and so I think we're at

41:52 a point where if you're not AI your your budget some somewhat at risk in selling into a CIO and and by the way one category that almost never gets reduced is security spin so if security spin's not going down and and AI is going up it's even you're more R if you're not security or not AI I think you're even more at risk of of of having trouble with expansion dollars and no there's

42:22 there's no there's no doubt about it that's what we've seen you know that's why I think you see some of this course slowing then one thing you didn't point out is when people have questions like about the future which they do around AI so let's say they're spending a bunch of money on workday B spending a bunch of money on Salesforce spending a bunch of money on snowflake or data bricks or you name it and now they go in

42:45 to present their case for this year and the first question that's going to get asked to them is well how are these guys doing with AI what are they doing with AI is this the multi-year bet we want to make or should we be betting on or should we be betting on Microsoft Azure it just freezes it says go back do more analysis and then come back to me and I think that's probably the number one

43:06 thing you're seeing here Bill rather than budget pressures what I really think you're seeing is the slowing down in the elongation of the big commits because people really need to make sure that they're betting on the future not on the past well and and that becomes especially true in two areas one is is any area where llms are proving to be effective and so in the Enterprise customer support is the one everyone's talking about right so if you sell a

43:39 system in that space and it's going to cause this freezing you're talking about r large because this is the area where Enterprises are experimenting the most it's where there's the most number of of application-based AI startups and it's the one where you're getting the most reinforcement in the public discourse about success you're hearing people you know I don't know if the Claret thing's real where you you fire 70% of your workers but there's plenty of people that Echo something similar to

44:09 what you heard about right co-pilot for programmers 20% gains of efficiency for your Workforce that kind of thing and so those areas are especially true in what you're talking about another area you know that that you just mentioned in HR you know there are a lot of applications in the hiring process you know I've seen a lot of AI apps in that area and so right you're going to freeze you know you're naturally going to freeze and say

44:37 oh I got to figure out what this is going to mean so there there are repercussions now there's a question like that kind of thing can go too far like in the example of scooters and Uber where where everyone thinks that it's going to be disruptive and it won't and and these are hard things to figure out the second category where this can happen is just where llms are really good uipath was a company that that took

45:02 a particularly big fall and if you study the different uses of RPA some of them are form based some of them are ingesting invoices some of them some of those automation processes are things llms are very very good at right and then that puts you more in the Crosshair right yeah I think I think you nailed it and you know listen lots of people were short uipath lots of people are short the call center you know software

45:28 businesses for all the reason that you're talking about I think our good friend Aon Levy you know laid this out pretty well in in in this in this tweet here where he talks about these three major axes the things that you know are most likely to be replaced I mean it's similar to what you just talked about what's the level of automation being applied to the work what's the cost of the work that's being automated what's the volume or frequency

45:53 of the work that's being automated so like in the case of UI path to your point here's a business think about the setup here bill it grew only 6% in the quarter most of its free cash flow gets eaten up by stock based compensation so one might argue that you know it's not even real free cash flow on a per share basis and it's right in the center of the bullseye how AI can automate this stuff which at a minimum causes a lot of

46:19 churn a lot of delay and a lot of pricing pressure right so I think the Market's reaction to some of these things is pretty rational now take something that's I I think a hotter topic among a lot of our friends which would be Salesforce an incredible you know founder CEO and Mark Benny off Mark has been early to get on you know Trends whether they're social whether they're mobile Etc and he's been all over AI but you have a debate on the one hand

46:48 you have you know folks like you know like Chamas saying you know his company 8090 can can can really disrupt them because you can get 80% or 90% of the benefits for 80% of the cost Aaron would Levy would argue no way you can't do that people don't want a constellation of services like all these things exist because this is what Salesforce customers are demanding of them but I think part of the reason Salesforce has recovered well here bill is this is a

47:18 company that has gotten fit right this is a company that is running efficient you know so out of their 13 billion of free cash flow they convert I think they have2 or three billion doar in SBC and so they convert over10 billion in free cash flow so if you look at it for a market leader it's not that expensive even though its growth rate has slowed way down and then I think you know listen you you've asked me a

47:44 fair bit about Snowflake and you know and folks you know because we were early investors in that company I get questions about Snowflake and data bricks and these data platforms all the time like what does it mean for for the database what does it mean for these data platforms so maybe just a second on that right I think one of the things people question you know when in in the case of snowflake growth decelerates to 26% you know people like okay yes the

48:14 multiple on free cash flow has come down a lot but they still have a lot of SBC you know a lot of that you know all that free cash flow gets eaten up by SBC so a lot more scrutiny gets put on those free cash cash flow and I think they're going to have to demonstrate how the growth rate will remain higher for longer and how they can get more fit around SBC if they want to maintain or you know

48:38 re-expand their multiple but you know when I evaluate them or data bricks across the three axes you know that that Aaron laid out they have a lot of things that they can expand in our upsides I think from AI first I just think the core business of data data is a primitive to AI you need structured data you need unstructured data I I happened to be at their event last week you know I see the head of data from Exxon Mobile

49:07 talking about how they're going you know Allin on on you know data engineering and the data platform there and there's a lot more you know workloads that they're going to bring to bear so I think just the stickiness of Enterprise relationships outside of Silicon Valley it's deep and it's Broad and these companies have made long-term commitments to these platforms they're not just going to shift them you know in a second though they may slow down expansions to the point we just made but

49:34 what are a couple of the easy places I think that data bricks and snowflake can go to automate functions one would be transforming data right so if you have a hundred different sources of disperate data just think you got to dup that data you know you got to cleanse that data all the things that there used to be a lot of manual interventions a lot of workloads in order to do I think AI can do that particular well AI

49:57 infrastructure training models building chatbots fine-tuning again I think that they can build all those guys are building the AI infrastructure to do that and then just basic thing like how do we extract signal from the data so text to SQL right being allow allow somebody to to to talk to the data and spin up uis you know or you know that that really used to be big businesses unto themselves business intelligence companies so I think that

50:26 there is an opportunity for that and in fact you know there was this video I think that one of my analysts post I saw it posted by a few people on Twitter which is Jensen and we'll spin it up here so that snowflake is no longer just a data company but they're also a Computing company running cortex big opportunity for snowflake if you guys are watching if you guys are following snowflake snowlake just added a new business to themselves not

50:55 just Computing not not just data processing but computer accelerating computer Jensen talking about snowflake over in Taipei this week in the context of Cortex Ai and he said listen this is a huge new business that we've done in partnership with them that is totally upside to their Core Business now whether or not that in fact shows up and the revenue shows up that's at the heart of the debate that everybody's having about every one of these platforms today

51:25 it's interesting it ironically it gets at one of the same things we've talked about on the consumer side with with memory and today the llm because it's so text heavy and how it works how it was built I mean text is the the kind of the Cornerstone to it and language and as a result you know when people use the word hallucina hallucination or or whatever you know they're talking about errors and you can't really rely on a system to

51:56 be numeric if it hallucinates and so you're not going to run your accounting on an llm you know today and if I think the interesting qu so so today you're in the Enterprise you're seeing a lot of we already top of customer support in the database area we're talking about having basically language translate into very complex queries right and have the llm live between the questioner and the data source and therefore provide value

52:29 by being a a UI of sorts right for for input and output let me give you the example of this I mean how many times have you wished that you you know like CEO running a business they don't want to go to their data analyst to try to spin something up they have a question they just want to ask their computer like ask Google and it gives you the freaking answer yes yes yes totally I totally get it and and that's what

52:54 that's what's happening and that's what people are doing there's a company called glean that has a bit of momentum that props up kind of an a universal corporate AI query against a bunch of different data sources in your business and there's authentication and security risk and all this stuff and they help you manage all that but I think the long-term question about how disruptive this will be for the app companies comes down to whether any of the foundational

53:24 model companies eventually build in a data store that is easy to query and is holistic and not lossy and it that hasn't happen to date but I bet you it's something they're thinking about from a multimodal standpoint such that a developer today any developer using a foundational models using a separate data store right and they're using it for UI they're using it potentially for data cleansing or anything like that but they're not storing numeric data

53:56 data inside of it so I think that'll be something to watch over a very long time frame to see if anyone tries to build that in to the to the API if you will on how you use one of these models and this this really bill is I think what happens at the start of these phase shifts right you know it is the fog of war and we get these headlines the end of software software is dead I will tell you you

54:24 know like in techn ology you probably have better opportunities listening to the wise words of Warren Buffett which is you know you buy when there's blood in the streets and you sell when there are trumpets in the air and trumpets were in the air in software during 2021 right because people said these are annuities the discount rate should be really low they're going to last forever they're going to grow 22x Revenue multiples correct correct and now in a

54:55 very short period of time you had a disruptive Force we tend to overshoot and I suspect that these headlines the end of software the death of software in I would argue less than 24 months will will appear to be silly I think there's some really interesting Investments to be made particularly in the public markets because a lot of these incumbents have incumbent advantages and you know they're going to accelerate when all of this inference starts coming online in Q3 and Q4

55:26 remember they had to invest ahead of the revenues coming online you have to buy that capability and build that capability and hire those teams now my suspicion is you'll start seeing some of this acceleration late in Q3 Q4 of this year heading into next year and when that happens people will say oh no software is not dead it in fact is an accelerate but it's not going to be equally good for all companies I do think there are companies like uip where

55:56 the fundamental value proposition is challenged they have to reinvent the model and I think there are other businesses that's going to be an accelerant to the Core Business I will I will take the other side of this what you just said to to a certain extent which is I don't think you can simultaneously have people get re optimistic about software and the hype cycle of AI to continue at the pace it's been on because I think they're at odds

56:23 with one another because the the most glorious statements about what AI is and can do say it replaces everything and as long as that's being trumpeted and believed by enough people I think I think the the onus is on you know everything moves from from half full to half empty for anyone that's not holistically AI yeah we we shall see that's what makes a market that's what makes a

56:54 podcast that what that's what makes the the the basis for Ur and I's debates over the last 20 years I mean if it wasn't AI disrupting something it was the mobile phone disrupting desktop search and how whether we could monetize that you know it was the internet disrupting what came before it two quick things before we we leave one I look forward to tomorrow it's cool you're GNA be there so you can let us know exactly how it goes I think that'll

57:23 be really interesting and then I was really kind of positively moved by this we can put it in the thing but Google Gemini did a ad with Mark cubin highlighting their Enterprise apps doc sheets you know and I was compelled I like and it's an area where they have not invested a lot they've always had sheets and docks and a lot of the startups in our community

57:55 live on that stuff but it it hasn't really competed with the Microsoft stack and with sacha's comeback everyone's been s you know super excited about what this means for Microsoft and if they play their cards right at Google and and tie this into Android even it could be it could be a huge win for them it fun to see this thing I recommend people check it out it's a i i i you got to pay for the price of admission here this is

58:23 an incredible time to be alive all this Innovation I certainly know coming out the other end it's going to yield a lot of prosperity and so you know who the particular winners or losers are what the time scale is that's what we get paid to figure out but I have no doubt that this is good for all of us bill I'll see you soon take care man as a reminder to everybody just our

58:54 opinions not investment advice sh