Nvidia Part I The GPU Company (19932006)

In the early 1990s, amidst a fiercely competitive market of 90 undifferentiated companies crafting computer graphics chips, Nvidia, led by visionary CEO Jensen Huang, emerged as a trailblazer. Co-founders Jensen Huang, Chris Malachowski, and Curtis Priem navigated a tumultuous journey, from nearly going bankrupt to reshaping the industry with their groundbreaking GPUs. With strategic partnerships, including a significant deal with Microsoft for the Xbox and the creation of programmable shaders, Nvidia not only survived but thrived, becoming the 8th largest company by market cap. Their relentless innovation and ability to ship products at an unprecedented pace, doubling performance every six months, positioned them as a dominant force in the rapidly evolving world of computer graphics, gaming, and beyond.

• David Rosenthal and Ben Gilbert introduce the podcast and themselves.
• Ben Gilbert is a co-founder and managing director of Pioneer Square Labs and PSL Ventures.
• David Rosenthal is an angel investor based in San Francisco.
• They discuss Nvidia, highlighting its market position and history.

"Welcome to season ten, episode five of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures."

The quote introduces the podcast and Ben Gilbert's professional background, setting the stage for the episode's focus on Nvidia.

• Nvidia began in 1993, creating computer graphics chips in a competitive market.
• The company now holds an 83% market share of standalone GPUs for desktop and laptop computers.
• Nvidia pioneered a new market with hardware and software development tools for machine learning and deep learning in the cloud and data centers.
• The co-founder and CEO, Jensen Huang, took significant risks, betting the company three times and nearly going bankrupt.

"When Nvidia began in 1993, it made computer graphics chips in a brutally competitive and low margin market. There were 90 undifferentiated competitors all doing basically the same thing at the same time. And yet today, they have an 83% market share of standalone GPUs."

This quote summarizes Nvidia's humble beginnings and its rise to a dominant market position, emphasizing the competitive environment and the company's significant growth.

• Jensen Huang used to drive a Toyota Supra and survived a severe car accident.
• He is compared to Elon Musk for his risk-taking and determination.
• Huang is known for his will to survive and his intense competitive spirit.

"All right, so here's everything you need to know about Jensen. The cliffs notes. Before we talk for, like 6 hours about him, the dude used to drive a Toyota Supra, like a Fast and the Furious style, like a death machine, and he almost died. He got in, like, a huge accident."

The quote provides a brief overview of Jensen Huang's character traits, emphasizing his risk-taking nature and survival instinct.

• Pilot is a sponsor of the podcast, providing accounting, tax, and bookkeeping services to startups and growth companies.
• The philosophy of focusing on what makes a company's product unique and outsourcing the rest is discussed.
• Pilot has grown to become a significant accounting firm backed by notable investors.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

The quote introduces Pilot as a sponsor and its role in providing financial services to companies, highlighting the importance of focusing on core business strengths.

• The hosts discuss the context of Silicon Valley in the early 1960s and Jensen Huang's upbringing.
• Huang's family moved from Taiwan to the United States, emphasizing education and resilience.
• Huang's academic prowess led him to Oregon State University, where he met his wife, Lori.
• He worked at AMD and LSI Logic before starting Nvidia with colleagues from Sun Microsystems.

"So we start in February of 1963. What's going on in Silicon Valley in 1963? Let's see. Fairchild had already started, I think, and Silicon Valley was, like, underway. But it was early days. But we start not in Silicon Valley, but in Taiwan. Yes, the southern part of the island of Taiwan with the birth of Jen. Soon, Huang later americanized to Jensen. Jensen Huang."

This quote sets the historical and personal background for Jensen Huang, leading to his eventual founding of Nvidia.

• Nvidia's founders saw an opportunity in consumer 3D graphics and aimed to create a graphics card for PCs.
• The company faced skepticism about the potential market for PC gaming and the development ecosystem.
• Jensen Huang secured funding from Sequoia Capital and Sutter Hill Ventures with a strong referral from the CEO of LSI Logic.
• The name Nvidia was derived from the Latin word "invidia," meaning envy, and the abbreviation "NV" for next version.

"But back to Denny's that night. Nvidia is the first. They are the first dedicated graphics card company. They all decide, the three of them, that they're going to go in on this."

The quote captures the pivotal moment when the founders of Nvidia decided to pursue their vision for a dedicated graphics card company, marking the beginning of their entrepreneurial journey.

• NVIDIA's name is derived from the Latin word "vidia," which means envy.
• The founders decided to drop the initial "I" to start with "envy," aiming to be the envy of the industry.
• The color green was chosen for their marketing to play on the concept of "green with envy."

"V-I-D-I-A which means envy. And they're like, great, we'll be the envy of the industry. Nvidia. We'll drop the I at the beginning. So we start with envy. This is awesome." "Of course, they pick green. So later on they can have that marketing campaign of green with envy."

The explanation of NVIDIA's name highlights the founders' intention to stand out in the industry and their strategic choice of branding to reflect this ambition.

• NVIDIA faced intense competition with 89 other companies funded to do similar work.
• The company had to quickly build a brand and gain thought leadership in a new frontier of graphics technology.
• They aimed to enable graphics as a medium for storytelling, envisioning 3D graphics as an interactive and social form of entertainment.
• NVIDIA had to evangelize to developers to learn 3D game development for PCs, requiring the creation of their own APIs and SDKs.

"Careful what you wish for here, though, because again, as we've been saying, literally 89 other companies get funded within a couple of months to go do the same thing." "Our perspective is that they want to enable graphics to be a new medium to tell stories."

These quotes outline the competitive environment NVIDIA entered and their mission to pioneer in storytelling through graphics, despite the need to influence a market unfamiliar with 3D game development.

• NVIDIA's partnership with Sega for the Sega Saturn console required technical decisions, such as using quadrilaterals for polygons, which later proved suboptimal.
• The industry standard moved towards using triangles, which are the simplest shape for creating 3D graphics, leading to compatibility issues with NVIDIA's initial approach.
• The company's early designs were constrained by high memory costs, but as prices dropped due to Moore's Law, competitors with cheaper cost structures emerged.

"They decide that the way they're going to create, people probably know you create 3d graphics, you use polygons. That's why people are always talking about polygons in this industry. They have to decide on a sort of primitive for the polygon. They're like, oh, well, we'll use quadrilaterals for vertex."

This quote discusses NVIDIA's initial technical decision to use quadrilaterals, which later conflicted with the industry's shift towards triangle-based graphics, a fundamental challenge that NVIDIA would have to overcome.

• Facing near bankruptcy, NVIDIA had to make a strategic pivot, standardizing on Microsoft's Direct3D architecture and focusing on competing through performance.
• The company had to lay off 70% of its workforce and design a new chip in nine months, a task normally taking two years.
• To accelerate development, NVIDIA used emulation technology to design chips in software, which was slow but allowed them to bypass the usual prototyping process.
• Despite the Reva 128 chip having limitations, it performed well in the market due to its superior graphics performance.

"The only thing we can do is standardize on the same Microsoft direct 3d as everyone else, same architecture. And our only shot is just to compete on performance and try and become the best chip out there in this now sea of commodity chips."

This quote captures NVIDIA's critical decision to align with industry standards and prioritize performance to survive in a competitive market, demonstrating a turning point in the company's strategy.

• NVIDIA's experience with the Reva 128 chip taught them about market demands, particularly the importance of graphics performance for consumers.
• The company established a rapid development cycle, doubling performance every six months and outpacing the industry standard of 18-24 months.
• This development cycle aligned with Moore's Law, allowing NVIDIA to deliver increasingly powerful graphics cards at a consistent price point.
• As gpus evolved, they focused on parallel processing, which was particularly suited for graphics tasks and would later open up new applications beyond gaming.

"They're now shipping, relatively doubling essentially the performance in each generation with their hardware. And they're shipping it every six months."

This quote signifies NVIDIA's breakthrough in accelerating the performance of their graphics cards, which not only benefited the gaming industry but also set the stage for future advancements in parallel processing technologies.

• Early GPUs were hard-coded and lacked computation, dynamic lighting, and shading.
• Nvidia recognized the limitations and shifted to a six-month shipping cycle to compete effectively.
• TSMC, initially dismissive, became a key partner for Nvidia after a direct appeal from Jensen Huang.
• Nvidia's GeForce branding emerged from a contest, with the first GeForce GPU boasting significantly superior performance.

"If you're playing a game today, even the most basic mobile game or whatever, you're seeing dynamic lighting and shading, which we'll get into in a sec, all over the place."

This quote highlights the advancements in modern gaming graphics, emphasizing the importance of dynamic elements like lighting and shading, which were not present in earlier GPUs.

"So in the section with Jensen, they tell the story of how Nvidia at this point, it's got to be TSMC's biggest customer."

The quote indicates Nvidia's growth and importance to TSMC, becoming one of its largest customers, signifying a strong partnership between the two companies.

"They actually run a little contest of what they should name the products. And the winning name is Geometry Force. Force is with you, which they shorten to GeForce."

This quote explains the origin of the Nvidia GeForce brand name, which has become a respected name in the gaming ecosystem due to the product's performance.

• Nvidia leveraged strategic partnerships and product innovation to gain a competitive edge.
• The introduction of the GPU as a concept challenged Intel's CPU dominance and opened new markets.
• Nvidia's GeForce 256 was marketed as the first GPU, a claim that was both marketing strategy and a signal of future potential.
• Nvidia's IPO and partnership with Microsoft for the Xbox solidified its position in the industry.

"They would let all these flowers bloom. Be, yeah, yeah. Just plug into the PCI slots on our motherboards. No big deal. We're an open ecosystem."

This quote reflects Intel's initial strategy of allowing peripheral innovation before integrating successful products, a strategy Nvidia aimed to disrupt with its GPUs.

"We're a graphical processing unit, we're a gpu. It's a big middle finger to intel and this whole cpu dominant world."

The quote emphasizes Nvidia's bold statement in positioning the GPU as a significant and independent component, challenging the established CPU-centric paradigm.

• Nvidia's GeForce 3 introduced programmable shaders, enabling dynamic lighting and custom graphics.
• The company developed CG, an extension of the C programming language, to allow direct programming of graphics on GPUs.
• Nvidia's strategy shifted from solely hardware to combining hardware with software that enhanced developer capabilities.

"The GeForce three, which introduces for the first time programmable shaders and lighting on the GPU."

The quote describes a major technological leap by Nvidia, introducing programmable shaders that transformed the capabilities of GPUs and the gaming industry.

"This is game changing. The way to think about it is those gpus in quotes were fixed function graphics accelerators, so they would be able to map textures onto a set of polygons."

This quote explains the significance of Nvidia's move from fixed-function graphics accelerators to programmable GPUs, enabling a new level of customization and performance.

• Nvidia's gross margins were challenged by competition and strategic partnerships with low returns.
• The company had to continuously reinvent itself to stay ahead in the rapidly advancing technology sector.
• Nvidia's focus on high-performance computing was perceived as a shift away from gaming, leading to industry skepticism.

"Jensen has a great quote about this and he's giving this lecturer at Stanford years later and he says, when technology moves this fast, if you're not reinventing yourself, you're just slowly dying."

This quote underlines the necessity for constant innovation in the tech industry, as emphasized by Jensen Huang, to avoid obsolescence.

"They basically have these like six to ten year epochs, and during those, they have a meteoric rise when they do something contrarian that's off the rest of the industry."

The quote captures Nvidia's pattern of disruptive innovation followed by periods of growth, highlighting the company's strategy of making contrarian bets to lead the industry.

• Companies must optimally allocate finite resources for short-term cash flow and long-term strategic goals.
• Game consoles offer low margin revenue but may lack long-term strategic value for some companies.
• Decisions on resource allocation can impact both revenue streams and investment in new market segments.

"A finite amount of resources, you have to allocate your capital and your resources in the most optimal, both short term, cash flowing way, but also long term strategic know, it seems like from their sort of analysis, especially recently with game consoles, sure, we might be able to make some low margin revenue on it, but it's not strategic for us long term to do that."

The quote emphasizes the importance of strategic resource allocation, balancing immediate financial gains with the long-term vision, using the example of game consoles as a potentially non-strategic investment despite the possibility of revenue.

• Nvidia faced strategic challenges, particularly with the transition from the Xbox to the Xbox 360, which they did not power.
• The shift led to a significant loss of gaming revenue for Nvidia.
• Nvidia invested heavily in high-powered computing, raising questions about the company's direction and Jensen Huang's decisions.

"It's probably, at this point in time, a little too much of an exaggeration to say that they're out of the fire and into the frying pan, having solved their intel existential strategic challenge and ending up now sort of at ODS with Microsoft, that's too much. But there's a lot of truth to that."

The quote suggests that while Nvidia overcame one strategic challenge with Intel, it faced another with Microsoft, reflecting the ongoing strategic complexities in the industry.

• Intel announced Project Larabee in 2006, signaling a second major entry into the GPU market.
• Nvidia's position was threatened as they depended on Intel's motherboard, and Intel's entry raised questions about Nvidia's focus on scientific computing.
• The scientific computing market eventually expanded beyond its initial scope, proving Nvidia's bet to be successful.

"And in 2006, intel launches or announces this project Laraby, where they're going to be like a full fledged GPU maker."

The quote highlights Intel's strategic move into the GPU market, presenting a direct challenge to Nvidia's business.

• Finding product-market fit is a different challenge than developing power within a market.
• Nvidia had found product-market fit but was still in the process of establishing a source of power.
• The company's revenue flattened, and operating expenses increased due to investments in speculative areas.

"They make the point, and it's a very, very valid one, that when you climb the mountain as a founder and a company of finding product market fit, it's very different than climbing the mountain of then having to go develop power."

This quote distinguishes between the initial success of finding product-market fit and the subsequent challenge of building a powerful market position.

• Nvidia struggled to establish a source of power in the market, with no clear advantage in terms of the seven powers, such as switching costs.
• The company attempted to create switching costs with technologies like CG, but these efforts were not fully realized.
• Microsoft's interests did not align with Nvidia's goal of creating substantial switching costs.

"They really didn't have power. I mean, I'm trying to think, which of the seven powers can we make the best case that they did have? It's not switching costs. Switching costs are crazy easy."

The quote points out Nvidia's lack of market power, particularly in creating switching costs that could deter customers from moving to competitors' products.

• Simulation plays a crucial role in various industries, allowing for faster iteration and innovation.
• Nvidia's early experience with simulation helped shape the company's future direction.
• Democratizing tools for developers has been a key theme in Nvidia's strategy, enabling a broader range of creators to utilize their technology.

"So there's a thing that we're going to talk about a lot on the next episode, which is totally changing the world as we know it, which is things that we used to have to do physically, we now do in simulation."

The quote underscores the transformative impact of simulation technology, which has become a significant part of Nvidia's business and influence.

• Reflecting on venture capital decisions, Nvidia's survival and growth were not straightforward.
• Nvidia's ability to reinvent and adapt was critical to its success in the face of Moore's law and market competition.
• The story of Nvidia raises questions about the timing of venture investments during market proliferation versus consolidation.

"The company they backed was wrong, and yet it became. I don't know how long Sequoia has held. I mean, I think a lot of the GPs at Sequoia, and certainly Mark Stevens, who was one of my professors at GSB, who was on the board for Sequoia, is still on the board, have held their shares personally to this day. That's one of the best venture investment returns of all time."

This quote reflects on the venture capital perspective, acknowledging that while the initial investment thesis may have been incorrect, the outcome was remarkably successful, highlighting the unpredictable nature of venture returns.