20VC The OpenAI Memo Why Invest Is it too Late to Catch OpenAI Are OpenAI's Models Truly Defensible Does the Value in AI Accrue to Incumbemts or Startups Application LayerInfrastructure What Happens with Regulation with Vince Hankes @ Thrive



In this episode of 20vc, host Harry Stebbings interviews Vince Hanks, an investing partner at Thrive Capital, who led Thrive's investment in OpenAI's latest funding round. Vince discusses the transformative potential of AI, emphasizing how it's changing the way companies operate and its impact on software. He reflects on the importance of customer empathy and understanding the nuances of business building. Vince also shares insights on his journey from Goldman Sachs to Tiger Global and then Thrive, where he learned the craft of venture investing and the value of maintaining a learning curve. The conversation touches on the rapid adoption of AI, the competitive landscape, and the role of regulation. Vince highlights OpenAI's proactive approach to regulation, security, and safety, and the importance of infrastructure in supporting AI scalability. Despite the high valuation of OpenAI at $29 billion, Vince and his team at Thrive decided to invest, banking on the exponential growth and transformative nature of AI technology.

Summary Notes

Transformation of Software Companies

  • Software companies are undergoing a rare transformation due to the influence of OpenAI.
  • OpenAI's proactive approach is changing the cost curve and contributing to the open source community.
  • OpenAI's focus on regulation, security, and safety is noteworthy.

"Company after company, I think OpenAI is quickly figuring out the cost curve. They have done a lot in the open source community on regulation, security and safety. I think they're being pretty proactive."

This quote highlights the speaker's admiration for OpenAI's impact on the cost structure and its contributions to important aspects like security and regulation within the open source community.

Introduction to the Podcast and Guests

  • Harry Stebbings introduces the podcast "20 VC the memo" focusing on OpenAI.
  • Vince Hanks, a partner at Thrive Capital, led the financing for OpenAI and has a notable investment background.
  • Vince's role at Thrive includes leading investments in several companies and sitting on various boards.

"Led the financing for Thrive capital in OpenAI's latest round, Vince Hanks."

The quote introduces Vince Hanks as the lead financier for OpenAI's latest funding round through Thrive Capital, establishing his significance in the investment community.

Sauna and Marketer Hire Advertisements

  • Sauna is an AI-powered learning and knowledge sharing platform that integrates with company apps.
  • Assistant, a feature of Sauna, can generate content for various purposes, including employee onboarding.
  • Marketer Hire is a platform for hiring expert marketers quickly and efficiently, with a rigorous application process.

"Sauna is an aipowered learning and knowledge sharing platform." "Marketer Hire is a talent platform to hire expert marketers on demand."

These quotes describe the services offered by Sauna and Marketer Hire, emphasizing their AI capabilities and the efficiency of the hiring process for marketers.

Vince Hanks' Background and Career Path

  • Vince Hanks started his career in business and accounting, working at Goldman Sachs.
  • His experience at Goldman Sachs included working on big company transactions like AT&T, Verizon, and Dell's merger with EMC.
  • Vince transitioned from Goldman to Tiger Global, where he focused on private company investing.
  • At Thrive, Vince's approach to investing contrasts with his experience at Tiger, focusing more on product and customer empathy.

"After doing that for about 18 months, I ended up wanting to do something different. And I got staffed on Flipkart, which is this ecommerce business in India."

The quote explains Vince's career transition from working on large corporate transactions to focusing on an e-commerce business in India, which eventually led to his involvement with Tiger Global.

Learning from Lee at Tiger Global

  • Vince credits his early career success to working with Lee at Tiger Global.
  • Tiger Global's financial rigor and focus on P&L were key learning points for Vince.
  • Thrive's approach to investing is more empathetic towards entrepreneurs, focusing on the product and customer experience.

"But what's interesting is when you contrast that to what we do at thrive and how Josh has built the firm."

The quote contrasts the financial approach at Tiger Global with the more founder-centric approach at Thrive, highlighting the different investment philosophies.

Motivators and Personal Growth

  • Vince discusses the importance of understanding personal motivators and how they influence decisions.
  • He emphasizes the need for a steep learning curve and leveraging relationships to compound learning.
  • Vince's personal motivator is maintaining a mindset of continuous learning and growth.

"But over time, I've realized your friends, your spouse, your coworkers, the people you're around and so forth, all of those folks, you can compound your learning curves together."

This quote reflects Vince's realization that personal and professional growth can be amplified through the collective learning experiences of those around him.

Building Trust with Founders

  • Vince talks about the importance of building trust within organizations and with founders.
  • Predictability and not surprising founders with decisions are key to building trust.
  • Trust is built through mutual understanding and empathy, as well as clear communication.

"Trust with founders is actually just being very predictable."

The quote emphasizes the importance of predictability in building trust with founders, suggesting that clear and consistent behavior fosters trust in professional relationships.

Maintaining an Even Keel

  • Vince attributes his level-headedness to his experiences and environment.
  • He believes in maintaining balance and not getting caught up in market emotions.
  • Trusting one's gut and being emotional at the right times is also important.

"Things are never as good as they seemed, and they're never as bad as they appeared."

This quote serves as a reminder to maintain perspective during both good and bad times, suggesting that neither extreme is usually as extreme as it seems.

AI Hype Cycle

  • Vince addresses the current hype around AI and the dilemma investors face on whether to dive in or stay patient.
  • The focus should be on core value to the customer rather than chasing deals.
  • Comparisons are made with the crypto hype cycle, and the importance of understanding the underlying value is emphasized.

"This is the question I think every investor is probably asking themselves right now."

The quote captures the uncertainty and excitement in the investment community regarding the potential and hype surrounding AI as the next big thing.## Hype Cycles and AI Primitives

  • Hype cycles can drive technology company valuations based on belief and speculation.
  • Historical examples like the .com bubble show infrastructure-related companies like Microsoft, Intel, Cisco dominating market cap.
  • Investments in hype cycle peaks can lead to long break-even periods (e.g., Microsoft in 2000).
  • Understanding the core primitives of AI is crucial, despite not knowing all of them today.
  • AI is currently providing obvious benefits, reducing marginal costs of content production, and forcing companies to consider potential disruptions.

"And so we ask ourselves, what's the core primitives of AI? We don't know them all today, but we can try to figure out what some of them are and we can really try to understand products and there's obvious benefits to those things today."

This quote emphasizes the importance of understanding the foundational elements of AI technology to identify its benefits and applications in various fields.

OpenAI and Investment Decision

  • OpenAI's rise was noticed due to startups using AI tools for marketing copy and blog posts.
  • Initial interest in OpenAI was sparked by a demonstration of their technology and GPT-4.
  • The transformative potential of AI technology in software was a key factor in deciding to invest.
  • OpenAI was chosen for investment despite it not being an obvious choice for many investors.

"And we looked at each other, we're like, wow, the way companies are going to get changed is going to be incredible. Software is going to look so much different."

This quote captures the moment of realization about the transformative impact AI technology, like that of OpenAI, could have on the future of software.

Investment Analysis and TAM

  • Precise Total Addressable Market (TAM) estimation is challenging in early technology cycles.
  • Comparing new technology's potential scale to past tech movements like iPhone, AWS, Google can be insightful.
  • The focus is on envisioning the future world influenced by AI and the potential for creating new categories and companies.

"But the technology, if you really think about it, and the zeitgeist it's captured it, is of that elk of the transformation it can have of the world."

This quote discusses the difficulty in precisely estimating TAM for emerging technologies, emphasizing the importance of understanding the broader impact and potential for transformation.

The "One Model to Rule Them All" Debate

  • OpenAI's approach includes both open-source contributions and a paid core GPT model.
  • The decision to use OpenAI's model is influenced by the desire to avoid infrastructure challenges.
  • OpenAI's ecosystem is scaling to support the influx of users and focus on cost efficiency.
  • The debate is whether a single model like OpenAI's will dominate or if multiple models will coexist.

"I don't think I would characterize OpenAI as one model to rule them all."

This quote clarifies the speaker's view that OpenAI's strategy is not solely focused on a single dominant model, but also includes contributions to the open-source community.

Model Commoditization and Edge

  • Commoditization of AI models is not the sole factor for success; the ecosystem around the model is crucial.
  • OpenAI's rapid user growth and ecosystem development, including plugins, are significant.
  • The future will likely value the robustness and convenience of the ecosystem over raw model output.

"That is not about commoditization model, that's about ecosystem and the kind of classic things that make great businesses in."

This quote suggests that the long-term value and edge of an AI company like OpenAI will come from the strength and versatility of its surrounding ecosystem, not just the AI model itself.

Competitive Threats in AI

  • Big tech companies are the main competitive threats due to their AI talent and resources.
  • Despite organizational challenges, big tech's AI capabilities should not be underestimated.
  • Startups and big tech alike are rapidly shipping AI products, creating a competitive landscape.

"I think it's hard to be dismissive of these companies. If you think about where the best talent in AI is right now."

This quote acknowledges the competitive threat posed by big tech companies in the AI space, highlighting their concentration of AI talent and potential to innovate.## Speed and Execution in Startups vs. Big Companies

  • Big companies are shipping AI products rapidly, challenging the traditional advantage of startup speed.
  • Startups need a multi-year execution window to compete effectively.
  • Incumbents have significant distribution and talent resources.

"Microsoft 200,000 person company. They've shipped AI in Bing, AI in PowerPoint. They're rolling out of the other products. Adobe's got the content creation in their product already..."

This quote highlights the rapid innovation and product development in large companies, which poses a challenge for startups that typically rely on speed as their competitive edge.

Investment Strategies in Startups and AI

  • The key investment question is whether incumbents will acquire innovation before startups acquire distribution.
  • OpenAI has startup agility with incumbent-level distribution, making it a formidable competitor.
  • It's uncertain whether AI's value will be captured more by incumbents or startups.
  • New technology cycles create opportunities to establish new categories, where incumbency is less relevant.

"The big question when investing in startups is will the incumbent acquire innovation before the startup acquires distribution."

This quote encapsulates the strategic consideration for investors in the startup landscape, particularly regarding how startups and incumbents compete and the timing of market entry and growth.

Value Accrual in Tech: Infrastructure vs. Application Layer

  • The application layer is believed to capture more value than the infrastructure layer.
  • Infrastructure companies can be seen as toll roads, benefiting from the ecosystem without direct competition.
  • Applications deliver new experiences directly to end customers, where the most value is created and captured.

"I have to believe it's going to accrue mostly to the application layer."

The speaker expresses a belief that the application layer, which interacts directly with customers, will ultimately capture more value than the underlying infrastructure layer.

Investing Amid Rapid Market Changes

  • Investment focus is on extraordinary founders who can pivot and adapt.
  • Markets evolve, necessitating adjustments to investment strategies.
  • Clarity on who the customer is and what the product offers is crucial for successful investments.

"You want extraordinary people in really great sandboxes, and those folks will be able to figure out how to pivot and adjust and iterate to take advantage of opportunity in this environment."

The speaker emphasizes the importance of investing in adaptable founders who can navigate rapidly changing markets and seize emerging opportunities.

The Role of Regulation in AI

  • Regulation is inevitable and necessary for AI.
  • Effective regulation requires partnership and education between builders and regulators.
  • Poorly designed regulation can be counterproductive; a balanced approach is needed.

"I think regulation will come to AI and it will be necessary."

This quote acknowledges the necessity of regulation in the AI industry and suggests that it should be developed in collaboration with those who are building the technology.

Investment Valuations and Scenario Planning

  • Discussions on investment valuations consider both financial rigor and potential transformative impacts.
  • The scalability and adoption pace of technologies can justify high valuations.
  • Investments in potentially iconic companies are made with a balance of quantitative analysis and creative thinking about future possibilities.

"The price here was high just on an absolute basis. It doesn't matter what company you're investing in at the prices that this round was done, you're talking about very upper echelon type outcomes to justify good returns."

The speaker reflects on the high valuation of an investment, acknowledging the need for exceptional outcomes to justify the investment based on the price paid.

Decision-Making in Investment Firms

  • Investment decisions are team-oriented, with a culture of support and growth mindset.
  • The firm's structure allows for making large, potentially transformative investments.
  • A small, focused team enables creative thinking and concentrated investment efforts.

"We have a culture where we support each other and we have a growth mindset and learn."

The quote emphasizes the team-based culture and learning mindset that facilitate making significant investment decisions collectively.## Psychological Safety at Thrive

  • Thrive promotes a culture where team members can take risks without fear of negative consequences.
  • Psychological safety enables the firm to embrace transformational opportunities.
  • The environment at Thrive does not punish failure, allowing for innovation and growth.

"And being able to lean into that and not be afraid that if it goes wrong, we're going to get fired, or if it goes wrong, we're going to be pushed down in the firm. I think having that psychological safety that enables a firm to do it. And I think we have that at thrive."

The quote highlights the importance of psychological safety in the workplace, which encourages employees to take risks and innovate without the fear of being penalized for failures.

Evolution of Investment Mindset

  • The speaker has developed a deep empathy for the customer in their investing mindset.
  • Understanding the business, product, and customer needs is crucial for mapping out a successful investment.
  • The best companies can articulate their value proposition clearly at all levels.
  • The intersection of financial rigor and company-building is key to successful investments.

"The thing I've developed the most on in my investing mindset is this deep empathy for the customer, trying to really think deeply about not just what's the product and trying to write that down on paper, but really to understand how the business is going to get built and mapping those nuances to who the person is, what the product does, how does that manifest itself in the business?"

This quote emphasizes the speaker's shift towards a customer-centric approach in evaluating investments, considering how a business will grow and serve its customers effectively.

Learning from Investment Mistakes

  • Recognizing unique qualities in each company is essential.
  • The speaker's mistake involved applying a one-dimensional mindset to an investment opportunity.
  • Open-mindedness towards a company's metrics and qualitative aspects is necessary for proper evaluation.
  • Over-reliance on patterns can lead to missed opportunities.

"The one that I think stands out the most to me, or at least comes back to me a bunch in my psyche, is when I was at Tiger, I flew out to Sydney and spent a bunch of time with the canva team in person... And so we shouldn't value this like a highly recurring software business. We should value it like a consumer subscription business."

This quote reflects on a specific investment error where the speaker failed to recognize the unique potential of Canva due to a rigid investment framework, leading to a missed opportunity.

Biggest Investment Wins

  • Authenticity is crucial in forming successful partnerships with founders.
  • Building relationships and trust with teams is more important than transactional interactions.
  • Wins are attributed to being true to oneself and investing time to establish genuine connections.

"What a founder might be attracted to for me might be different than you, Harry might be different than the next investor that's listening to this podcast. And so you can't just apply someone else's style and say it's going to work for you and you're going to win."

The speaker underscores the importance of individual authenticity in the investment process and the need to create a personal connection with founders for successful outcomes.

Content Consumption

  • Reading a variety of content, including podcasts, newsletters, and blogs, is part of the speaker's learning routine.
  • Understanding the history of topics, such as AI, is important.
  • Embracing different perspectives and learning about key figures in a field enriches knowledge.

"The short answer is just reading anything. I think for me, I like to try to subscribe to lots of different angles of reading."

This quote conveys the speaker's diverse and inclusive approach to content consumption, emphasizing the importance of a broad perspective in staying informed.

Reflection on the Investment Landscape

  • Market environments significantly influence company momentum.
  • Good execution is not always synonymous with great momentum.
  • A balanced perspective on attributing success to market conditions or company execution is necessary.

"One thing I've changed my mind on is you got to be more balanced about how much credit you give to the momentum of a company from the market environment versus the actual execution they're doing."

The speaker has shifted their view to acknowledge that both market conditions and company execution play roles in a company's success, advocating for a more balanced approach to evaluating performance.

The Impact of Low Interest Rates

  • The crypto market experienced a peak market cap of around 3 trillion during low interest rates.
  • Speculation and hype cycles can lead to significant overvaluations and fraud.
  • Investors should be wary of hype and thoroughly evaluate the fundamentals of investments.

"Crypto stands out. We talked about Peakmarketcap and I think Crypto's peak market cap for tokens was like 3 trillion, somewhat similar. The most iconic company that people talked about was a fraud."

This quote reflects on the volatile nature of the crypto market during the low interest rate period, highlighting the risks of speculation and the importance of due diligence in investing.

Board Member Selection

  • Eric Vishria is admired for his operational instincts and effective communication with entrepreneurs.
  • The speaker values a balanced perspective on commercial aspects and strategy.
  • Learning from experienced board members is crucial for personal growth.

"The person that stands out that I've learned so much from is Eric Vishria... And he also just has a really great balanced perspective on being commercial and understanding how all of that works and interplays with the strategy of the company."

The quote reveals the speaker's admiration for Eric Vishria's skills and the impact Vishria has had on the speaker's approach to board involvement and strategy.

Lessons from Working with Josh

  • Success does not require sacrificing personal values, such as family and friends.
  • Josh's warmth, empathy, and prioritization of family are highly respected by the speaker.
  • The speaker has been influenced by Josh to balance career ambitions with personal life priorities.

"Josh is an amazing person... And his priority of his family over everything else is so obvious when you spend time with him."

The speaker shares a lesson learned from Josh about the importance of maintaining personal priorities alongside professional success, highlighting the value of work-life balance.

Future Ambitions

  • The speaker aims to be part of building Thrive and investing in transformational AI companies.
  • Attracting talented individuals to the firm and maintaining a strong culture are priorities.
  • The speaker looks forward to discussing the firm's progress and successful investments in the future.

"Hopefully we'll be talking about some amazing AI companies we invested in that created lots of value for us both... And so I hope if we talk again in five years, we're talking about those companies, we're talking about the people on our team and ultimately we're really excited about all that stuff."

This quote outlines the speaker's goals for the future, which include successful AI investments, team building, and maintaining a positive firm culture.

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