In a dynamic conversation on 20vc with Harry Stebbings, Sarah Guo, founding partner at Conviction Capital, discusses the transformative potential of AI in creating billion-dollar businesses with small teams and the importance of speed for startups. She reflects on her departure from Greylock to focus on early-stage investing and the desire to be an entrepreneur again. Sarah emphasizes the need for venture capital to adapt to the rapid pace of AI development and advocates for VCs partnering with policymakers to address societal impacts, such as wealth inequality. She also critiques the over-capitalization in tech startups and the challenges it presents. With Conviction Capital, Sarah aims to generate best-in-class venture multiples, become a significant part of important companies, and be beloved by entrepreneurs, all while nudging the productive and aligned use of AI in the world.
"AI is the biggest value creation opportunity in our lifetimes. Like, I'm quite confident that we're gonna have ten and 20 person teams building billion dollar businesses. The only real advantage startups have is speed. Speed actually might matter more than ever when the environment seems to be moving at warp speed."
The quote emphasizes the speaker's confidence in AI as a transformative force in the economy, highlighting the ability of small, agile teams to create significant value quickly. This underscores the competitive edge that startups have due to their ability to move and adapt rapidly.
"I really wanted to focus on early stage investing. Zero to one is just magic and I wanted to be an entrepreneur again."
This quote captures Sarah's passion for the early stages of company development and her entrepreneurial spirit, which led her to leave a well-established venture capital firm to start her own fund.
"A fund is a business like any other, right? I run rippling payroll now. We have an office like these, sort of administration, and we have two sets of customers, entrepreneurs and lps."
The quote reveals that managing a fund is multifaceted, involving not only investment decisions but also the management of a business with various stakeholders and operational responsibilities.
"The episode was why conversational will be the next big thing, which is, I think, like a shade early."
The quote reflects on a past prediction, acknowledging that while the idea was correct, the timing was not perfectly aligned with market readiness.
"I think the productivity benefit is incredible. That's possible. And that doesn't mean, like we as a society and on the policy side and in a very democratic way need to address that distribution. But I think it doesn't mean to me, don't make progress."
The quote recognizes the tension between the benefits of AI-driven productivity and the risk of increased wealth inequality. It suggests a need for societal and policy measures to manage distribution while still encouraging technological advancement.
"So I think the thing that is different today may be the speed of change. Like, I don't think we have decades to adjust to these capabilities in society."
This quote highlights the unprecedented pace of AI development and the urgency for regulators and technologists to work together to address the societal implications.
"So AI is the biggest value creation opportunity in our lifetimes. I'm quite confident that we're going to have ten and 20 person teams building billion dollar businesses."
Sarah reiterates her belief in AI as a major value creator and the potential for small teams to achieve significant success, justifying the focused thesis of Conviction Capital.
"Broadly, no, there's not a lot of deep understanding yet. This is a technical and dynamic field and the research is intersecting with the real world at a pace like I've never before encountered in more than a decade of investing."
The quote suggests that many venture capitalists may not have a deep understanding of AI, despite its rapid advancement and integration into various industries.
"Yeah, so I think the craziness in a small number of instances gets very amplified by the media."
This quote points out that the media can sometimes exaggerate the hype around certain AI investments, which may not reflect the broader reality of the industry.
"Yes, there is enthusiasm and less sensitivity to pricing in a certain style of AI company than others in this macro. But maybe five companies have come out of the gate raising a huge amount of money. That's not what most founders understand, but it's those five companies that the story gets repeatedly told."
This quote highlights that while a few AI companies have managed to raise substantial funds, this is not the norm for most founders. The media often focuses on these exceptional cases, leading to a potential misrepresentation of the broader funding landscape for AI startups.
"The broader response would be, I think, that a vanishingly small number of AI companies can spend $100 million upfront. Well, and constraint is the name of the game in startups, right. It breeds discipline and creativity. The other side of it is there are AI companies with really extraordinary traction right now."
This quote suggests that while the market sets the prices for AI companies, only a select few have the resources to invest heavily from the outset. Constraints in startups are seen as beneficial, leading to discipline and innovation, yet there are AI companies that are making significant progress and gaining traction.
"So the thing that is really expensive is I want to train a model from scratch that is very large, and it's going to take me low tens of people, probably 20 or 30 people that know how to do this type of research, and 10,000 plus gpus and x number of months, that is very expensive."
This quote explains the high costs associated with starting an AI company that intends to develop a large model from the ground up. It requires significant investment in specialized personnel and computational resources, which is a major factor in the capital intensity of some AI startups.
"And so 100 million dollar fund size is very focusing, like we do early stage, we don't do growth, we are not going to do things that structurally don't make sense for the fund."
This quote emphasizes that a $100 million fund size is strategic for focusing on early-stage investments and avoiding growth-stage investments that may not align with the fund's structure. The speaker implies that adhering to a specific investment strategy can lead to better outcomes.
"And I think the real thing that drives brand in the long term is a returns, b companies that matter, and c reputation with founders."
This quote conveys the speaker's belief that the enduring brand of an investment firm is determined by its performance, the impact of its portfolio companies, and its standing among founders, rather than mere association with well-known names.
"And the legal profession is a text in, text out profession. We can do a lot of the work that a first year legal associate does end to end with these large models, and that's very valuable."
This quote illustrates the practical application of AI in the legal field, where AI models can automate tasks typically performed by entry-level legal associates, demonstrating the transformative potential of AI in professional services.
"Ideally, you have some combination of customer backed domain knowledge and understanding of product and research."
This quote reflects the speaker's view that the most effective founders in the AI space are those who possess both deep domain expertise and an understanding of product development and research, suggesting that a balanced skill set is crucial for success in AI startups.
"I think we're going to get much more end to end stuff soon. And so I think we're going to have AI systems that can do these things and you'll just communicate your preferences, maybe more naturally than to a more generalist model than your average engineer today."
This quote envisions a future where AI systems will handle more comprehensive tasks, allowing humans to communicate their preferences directly to AI, which will execute the tasks with increasing proficiency. The speaker suggests a collaborative future where AI enhances human capabilities rather than supplanting them.
"Classically, the only real advantage startups have is speed."
This quote encapsulates the speaker's view that the primary edge startups have over incumbents is their ability to move quickly, a critical factor in the fast-paced world of AI innovation.
"How could you not? I think Satya and Kevin Scott have done an amazing job championing like really believing in this set of technologies, taking a bunch of bets, OpenAI and otherwise, and using it as an opportunity to try to leverage themselves into other markets that really matter, like search."
This quote recognizes Microsoft's proactive and visionary approach to AI, highlighting the company's successful bets and strategic moves to expand its influence in key markets through AI innovation.
"I believe in this idea of having high-resolution customer conversations."
This quote underscores the importance of engaging with potential customers to gain a nuanced understanding of their needs and problems, which can inform the development of a compelling and differentiated startup idea.
"The real trigger for forward progress is actual contact with customer, right? Not the like, oh, I have this high level idea. Is that interesting?"
This quote emphasizes the necessity of startups to have direct interactions with customers to understand their real problems and needs, rather than relying on assumptions or high-level ideas.
"Great founder meets bad market, market wins."
Sarah Guo agrees with the sentiment that a difficult market often prevails over even the most capable founders, highlighting the significant influence of market conditions on a startup's success.
"These are investments you make because of the founder."
Sarah Guo expresses regret over missed investments, underscoring the significance of the founder's capabilities and vision in her decision-making process.
"It doesn't exist. Quite literally. You're starting with nothing."
Sarah Guo argues that defensibility is not a realistic expectation for seed-stage startups, as they are in the very early stages of development without a proven market foothold.
"Incentives determine strategy, right?"
Sarah Guo discusses how the structure and incentives of venture capital firms influence their investment strategies and operations, implying that founders should consider these factors when seeking investment.
"Talk to founders that work with those funds. The simplest thing is to do references."
Sarah Guo advises founders to conduct thorough research on venture capital firms by speaking with other founders who have worked with them to gain insights into their operations and support.
"Empirically, there are different ways to be good at this, including more generalist ways."
Sarah Guo challenges the idea that generalist seed VCs are becoming obsolete, suggesting that there are various successful investment approaches in the venture capital industry.
"But there's no such thing as anything that is like a high quality, low effort project."
Sarah Guo acknowledges the hard work and dedication required to produce a successful podcast, dispelling the myth of effortless high-quality content creation.
"I think most of the pain is yet to come. We'll still be ugly."
Sarah Guo provides a pessimistic forecast for the tech startup landscape in 2023, anticipating ongoing difficulties due to past excesses in funding and operational inefficiencies.
"It may not be very well understood that a significant part of the opportunity for AI is services, not software market."
Sarah Guo highlights an underappreciated aspect of AI's potential, suggesting that its impact on the services industry could be transformative and far-reaching.
The legal profession today is a services market, it's not a software market.
This quote emphasizes the current state of the legal profession as primarily service-based and highlights the untapped potential for software solutions.
Yeah, I'd say I have a good domain broker and the fee base on 100 million dollar fund is minuscule.
Sarah Guo implies that with the right resources and considering the scale of the fund, the cost of a domain name like "conviction.com" is not a substantial expense.
You buy sequoia as the big dog incumbent.
This quote signifies Sequoia's strong position in the venture capital market, making it a desirable acquisition target.
I think that it will be a hard time for subscale seed stage funds without a differentiated strategy to persist.
Sarah Guo predicts a challenging future for smaller seed funds that lack a unique strategic approach.
If you can do code generation, you can do malicious code generation.
Sarah Guo highlights the dual-use nature of AI technology, particularly in the context of code generation, and the need for defensive measures.
It's not knowable what the outcomes are for companies at the very beginning.
This quote reflects Sarah Guo's view that the future success of companies is unpredictable at their inception due to the complex interplay of market forces and decision-makers.
So I think this is why reserves are complete bullshit.
Harry Stebbings expresses skepticism about the effectiveness of reserve strategies in venture capital, questioning their underlying assumptions.
A lot of investors, they lack individual conviction, they simply follow bigger brands and so more independent thinking would be good.
Sarah Guo criticizes the herd mentality in the LP landscape and calls for more independent decision-making.
I think he's as likely to be in prison.
Sarah Guo expresses doubt about the likelihood of a political figure's success due to potential legal challenges.
We want to be part of very important companies.
Sarah Guo outlines the aspirations for "Conviction" to be influential and respected within the venture capital community and among entrepreneurs.
Coder is the doc that brings it all together and it helps you and your team run smoother and be more efficient.
Harry Stebbings endorses Coder as an essential tool for team collaboration and project management.