20VC In AI Who Wins Startups or Incumbents What Happens to Wealth Inequality Why Will $10BN+ Companies Only Have 10 People Why Defensibility in Startups is BS & Speed is Everything Why Large Groups Worsen DecisionMaking with Sarah Guo

Summary Notes


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.

Summary Notes

AI as the Biggest Value Creation Opportunity

  • AI is viewed as a tremendous opportunity for value creation, with the potential for small teams to build billion-dollar businesses.
  • Startups' main advantage is their speed, which is crucial in a rapidly changing environment.

"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.

The Evolution of Venture Capital and Entrepreneurship

  • Sarah Guo reflects on her time at Greylock and her transition to launching Conviction Capital.
  • The decision to leave Greylock was driven by a desire to focus on early-stage investing and to be entrepreneurial again.

"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.

The Role of a Fund Manager

  • A fund is a business with its own strategy, operations, and customers (entrepreneurs and LPs).
  • Running a fund involves administrative tasks and strategic thinking, distinguishing it from being just a GP at a VC firm.

"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 Importance of Market Timing

  • Market timing is crucial, and the conversation touches on the previous prediction about conversational interfaces being the next big thing, which was slightly premature.

"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.

Concerns About Wealth Inequality and AI

  • AI's potential to centralize wealth is a concern, but the technology also drives abundance.
  • There is a need to address wealth distribution democratically, without hindering technological progress.

"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.

AI and Regulatory Challenges

  • The speed of AI development presents challenges for regulatory bodies to keep up and effectively regulate the technology.
  • Engagement with policymakers and education are crucial to bridge the knowledge gap.

"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.

Conviction Capital's AI-Focused Thesis

  • Conviction Capital aims to be central in the AI community and deeply understand the technology to identify and partner with founders of great companies.
  • Specialization in AI allows for community investment, strategic relationships, and an understanding of technical and dynamic fields.

"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.

Venture Capitalists' Understanding of AI

  • There is a mix of genuine enthusiasm and a lack of deep understanding of AI among venture capitalists.
  • The intersection of technical AI research with the real world is happening at a pace that requires a new level of engagement and understanding.

"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.

AI Funding Craze

  • The current excitement in AI funding circles is amplified, with a few instances receiving a disproportionate amount of attention.
  • The speaker suggests that while there is a lot of excitement, there may also be a lack of deep understanding and a potential for peril without proper knowledge.

"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.

AI Company Funding and Market Sensitivity

  • AI companies are experiencing varying degrees of enthusiasm and sensitivity to pricing within the current macroeconomic climate.
  • A small number of AI companies have raised significant funding, which is not representative of the majority of founders' experiences.
  • Stories of these major funding events tend to be amplified in the media, creating a skewed perception.

"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.

Character AI and Market Valuation

  • The valuation and funding of AI companies, such as those developing character AI, are determined by market participants.
  • There is a recognition that only a few AI companies can afford to spend large sums, such as $100 million, upfront.
  • Startups are typically characterized by constraints which foster discipline and creativity.
  • Some AI companies are experiencing extraordinary traction currently.

"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.

Capital Intensity of AI Startups

  • AI startups may require more capital in the early stages, particularly those aiming to build large-scale models from scratch.
  • The cost-intensive aspect of AI startups often involves hiring specialized talent and acquiring computational resources like GPUs.
  • Most companies are likely to utilize existing AI models provided by APIs or open-source platforms, rather than building from scratch.
  • Founders, especially those from a research background, often reconsider their initial plans after evaluating the necessity and practicality of large-scale model training.

"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.

Fund Size and Investment Strategy

  • The size of an investment fund can dictate the investment strategy, particularly concerning the number of investments and the amount invested in each.
  • Constraints can be beneficial for investors, just as they are for founders, leading to a more focused and disciplined approach.
  • The speaker's fund is positioned for early-stage investments, preferring a concentrated portfolio over a larger number of smaller investments.
  • There is pressure in the industry to raise larger funds, but the speaker questions whether this approach will lead to better returns.

"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.

AI Investment Philosophy and Brand Impact

  • The speaker's investment philosophy centers on partnering with companies that they believe in and want to support throughout their journey.
  • The long-term brand of an investment firm is built on the returns it generates, the significance of the companies it backs, and its reputation with founders.
  • The speaker is willing to forego potential brand benefits from investing in high-profile rounds if those investments don't align with their philosophy and strategy.

"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.

AI Opportunities in Tooling and Workflow Automation

  • The speaker sees significant opportunities in AI tooling, particularly in areas where errors do not have catastrophic consequences.
  • Investments in AI-driven legal services, such as Harvey AI, demonstrate the potential for AI to perform tasks traditionally done by humans.
  • Other attractive opportunities include code generation, RPA (Robotic Process Automation), and tooling for large language models (LLMs).
  • The speaker is excited about the potential of multimodal models for creative and marketing use cases, which could lead to cost reductions and improved content quality.

"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.

Founder Backgrounds and Importance in AI Startups

  • Founders with a combination of domain knowledge and an understanding of product and research are ideal for AI startups.
  • Most software will likely be built by product-oriented engineers who can leverage AI models as tools.
  • The speaker's fund assists in pairing domain experts with the research community to foster successful AI ventures.
  • As AI tooling becomes more accessible, there will be an increase in companies founded by customer-oriented individuals.

"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.

Future of Co-Creation with AI

  • The speaker predicts a shift in metrics for measuring AI's role in co-creation, moving from simple autocompletion to more end-to-end iterative processes.
  • AI systems are expected to become more adept at understanding human preferences and executing complex tasks based on iterative feedback.
  • The role of engineers will evolve to leverage AI tools more effectively rather than being replaced by AI.

"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.

Startups vs. Incumbents in AI Innovation

  • Startups have the advantage of speed, which is crucial in a rapidly evolving technological landscape.
  • Incumbents have traditionally been thought to have a data moat, but startups are becoming increasingly adept at collecting and generating data.
  • The battle between startups and incumbents in AI innovation is not clear-cut, with both having potential advantages.

"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.

Microsoft's Strategic Embrace of AI

  • Microsoft is hailed for its strategic and effective adoption of AI technologies, particularly through its partnership with OpenAI.
  • The speaker acknowledges the leadership of Microsoft executives in championing AI and leveraging it to enter new markets, such as search.
  • Other tech giants like Google, Amazon, and Apple may not be leading as effectively in the AI space according to the speaker.

"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.

The Importance of Idea Selection in Startups

  • The speaker advises founders to have high-resolution conversations with customers to identify non-generic, market-attached problems or open research questions.
  • Spending time to deeply understand a problem or market can lead to unique insights and a strong foundation for a startup.
  • The speaker encourages founders to focus on developing a depth of understanding before pursuing a startup idea, rather than hastily choosing a generic idea.

"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.

Customer Interaction and Feedback

  • The importance of direct customer engagement for startups.
  • Customer feedback is critical to gauge the importance of the problem a startup is addressing.
  • Real conversations with customers provide valuable insights and help in assessing their actual needs and the urgency of the issues they face.

"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.

Founder vs. Market

  • The debate on the importance of the founder versus the market in which they operate.
  • Even great founders may struggle in challenging markets.
  • A founder's ability to navigate and potentially improve a tough market is crucial.

"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.

Investing Mistakes and Anti-Portfolio

  • Reflection on missed investment opportunities and learning from them.
  • The potential for founders to change the market dynamics.
  • The importance of recognizing special founders and taking risks on their vision.

"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.

Startup Defensibility

  • The concept of defensibility for early-stage startups.
  • The importance of a founder's ability to navigate the market and develop a defensible thesis over time.

"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.

Evolution of Venture Capital Firms

  • The future of venture capital firms, both large multi-stage and smaller boutique firms.
  • The impact of a firm's size and structure on its investment strategy and founder support.
  • The importance of founders understanding the dynamics of venture capital firms when choosing investors.

"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.

Founder Education on Venture Capital Dynamics

  • The necessity for founders to understand the inner workings of VC firms.
  • The value of doing due diligence and references on potential investors.
  • The role of experienced ecosystem participants in guiding founders.

"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.

Generalist vs. Specialist Seed VCs

  • The debate on the viability of generalist seed VCs in the current tech landscape.
  • The notion that there are multiple ways to be a successful investor, whether specialized or generalist.

"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.

Podcasting as a Business

  • The realization that creating high-quality content requires significant effort.
  • The strategic importance of initial efforts in content creation to build an audience.

"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.

2023 Macro Outlook

  • Predictions for the macroeconomic environment in 2023.
  • The expectation of continued challenges for tech startups due to overcapitalization and lack of efficiency.

"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.

AI and the Services Market

  • The potential for AI to significantly impact the services sector.
  • The implications of AI on labor displacement and wealth distribution.

"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.

  • Legal services are currently a services market, not a software market.
  • Low-level work in legal services represents a significant opportunity for software enablement and replacement.
  • The potential market for software in legal services exceeds the current market size.

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.

Domain Acquisition Costs

  • The cost of acquiring the domain name "conviction.com" was not significant relative to the fund size.
  • Good domain brokers and a minuscule fee base on a large fund can make domain purchases relatively inexpensive.

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.

Venture Capital Firm Acquisition

  • If acquiring venture capital firms, Sequoia would be the choice for a multistage firm due to its execution and culture.
  • Instead of buying a seed fund, Sarah Guo would choose her own fund, keeping investments "in the family."

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.

Seed Funds and Multistage Firms

  • Subscale seed stage funds without a differentiated strategy may struggle to persist.
  • Early and growth investing are more distinct than they appear, and a blanket approach may not be successful.
  • Firms like Tiger might face challenges due to their early-stage investing strategies.

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.

AI and Code Generation

  • AI can be used for both beneficial and malicious purposes, including code generation.
  • There is a need for more conversation and investment in defenses against AI misuse.
  • AI tooling is being used by nation-states and hackers, which poses a risk if done at scale.

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.

Investing Outcomes and Market Dynamics

  • It is not possible to predict the outcomes for companies at the very beginning.
  • Market dynamics are influenced by actors with agency, making it difficult to forecast structural advantages.
  • The focus has shifted to being comfortable with uncertainty in how markets will evolve.

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.

Venture Capital Reserves

  • Reserves in venture capital are based on the flawed assumption that winners can be identified within a short timeframe.
  • Many supposed winners can quickly become losers, and vice versa.
  • Reserves may not be an efficient deployment of capital, especially for early-stage funds.

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.

LP Landscape and GP Commitments

  • The LP landscape is clubby and lacks independent thinking.
  • General Partner (GP) commitments are funded through fees, which can be counterproductive.
  • More independent thinking and conviction among investors would be beneficial.

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.

Political Outcomes and Predictions

  • There is uncertainty regarding political outcomes, such as elections and legal consequences for public figures.
  • Both Sarah Guo and Harry Stebbings acknowledge the unpredictability of political events in the U.S. and the U.K.

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.

Collaboration with Angels and Venture Success

  • Collaborating with independent thinkers and positive individuals is highly valued.
  • Success for the venture fund "Conviction" is defined by achieving best-in-class venture multiples and being relevant.
  • The goal is to be a beloved partner to entrepreneurs and to contribute positively to the use of AI.

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.

Tools for Efficiency and Collaboration

  • Coder enables team efficiency by centralizing project updates and resources.
  • AngelList provides comprehensive support for startups and venture funds, streamlining cap table management, banking, and fundraising.
  • Brex offers an all-in-one financial stack for startups, facilitating business account management and corporate card usage.

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.

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