ChatGPT becomes a monopoly.
It is transforming how everybody, every normal person basically does their work, funds their life.
The thesis of AI is too important to the future of nations to allow an American company to dominate in certain regions.
I think is going to prove to be true.
I actually believe you can probably cut 50% of the federal government.
What does the Commerce Department actually do?
People were like, where do you get your contrarian ideas?
I was like, I read books.
All the greatest thinking of all time is available to anybody.
You just have to read the US government is shut down, peace is breaking out in the Middle East and AI continues to reshape global power.
On this episode, I'm joined by Keith Raboy, Managing Partner at Coastal Adventures, and A16Z General Partner, Alex Rampell, to unpack how all these theses connect.
We discuss whether a new Middle East is emerging, what it means for US politics in Trump's second term, and why sovereign AI could redefine national competitiveness.
From there we zoom out to the economic implications of AI and if it can really drive GDP growth without inflation.
We also cover the fate of big tech incumbents Google Apple Microsoft Meta, Amazon and how AI threatens their moats.
Lastly, we end on Keith's broader philosophy, why he doesn't believe in experts how to answer the right questions and why sometimes it just takes one person reading the right books to change history.
Let's get into it.
Keith, welcome to the podcast.
Pleasure to be with you.
It's been a long time.
Excited to have you back.
It's an exciting day to do it.
Big day for the Middle East.
I feel like this is something you've been predicting for a while.
Actually, if you read Jared Kushner's autobiography, all you have to do is he quotes the Saudi king says you're going to bring peace to the Middle East.
And it turns out to be correct.
It's pretty obvious this would happen.
If you went to visit Israel recently in the last six, nine months, You could feel the tectonic plates shifting.
It was just a question of what would be the trigger.
And everybody's looking forward to the new Middle East.
You're going to see lots of countries make peace explicitly with Israel, which is great.
Whether they join the Abraham Accords directly or indirectly, it's all going to happen in the next six months.
Is your view that Iran is neutralized, that this leads to some sort of durable relationship?
Yeah, everybody off the record wanted Iran to be neutralized.
And they were basically blocking any progress.
People were scared, terrified.
And now that they've been neutralized, I think the natural arc of human history is for there to be basically progress innovation, technology innovation, actually in the Middle East driving piece AI, data centers.
You're going to see all of this.
It's really an interesting and fascinating feature.
Are you bullish on sovereign AI?
Do you sort of think that you might invest in that type of... We have a KV.
We invested in a sovereign AI company in Japan called Sakana.
The thesis of AI is too important to the future of nations to allow an American company to dominate in certain regions.
I think is going to prove to be true.
I think you still need to marshal the hard part.
That's easy to say at a conceptual level.
To implement that, though, you still need a martial, a critical density of talent of AI researchers.
And there's not that many world-class AI researchers across the globe.
I saw a public presentation by Jensen where he said there's 150 people on the planet who could actually build a foundation of Waddle.
He's probably more right than wrong.
And so you still, if you're going to build one for Germany or Europe or Israel or wherever, you're still going to need a critical density of those 150 people to be able to compete in at the cutting edge of frontier models.
But I think most countries are going to try.
Before we get to tech, just to close the politics front.
Do you think that this will end up defining Trump's legacy, or what do you think his second term will be remembered for?
Well, I was kind of thinking last night.
You know he's going to solve all the problems he inherited in the first two years.
Like, if you think about immigration, basically solved.
If you think about the Middle East on its way to being solved, he'll get Russia and Ukraine solved, I'm pretty sure.
Tariffs are bringing down the debt.
The growth rate is going to accelerate.
We're going to have 4% or more growth all of next year.
That will make the debt irrelevant.
You can grow your way out of deficits.
Interest rates still need to come down.
The Federal Reserve has been obstinate.
That'll eventually get fixed.
He will replace Powell at some point.
Dustin's going to continue to be outstanding.
So I think after the next year, it's going to be all upside.
And why doesn't Powell want to reduce rates?
What is the steel man for what?
Well, his argument, well, I don't know that he has a good argument.
I think he has Trump derangement syndrome.
He just hates Trump.
That's why he artificially lowered rates to try to get Kamala elected.
It is indefensible cutting 50 basis points off in last fall.
But he does see employment is running pretty hot.
But the difference is with AI and productivity gains through technology.
Hot employment does not necessarily yield inflation.
It's not just wage growth that's fueling GDP growth.
And so I think you're seeing some of the substitution where productivity gains can be made.
GDP can run 4 or 5 without triggering inflation, because you don't grow GDP just by paying humans more, which is the historical precedent.
And again, before I say, what's our sort of reflection post-Doge?
What did we learn from that experiment?
Well, actually the funny thing is I was watching some political polls and there's not that many pollsters that I find accurate, but there's a few.
And until this week, Trump's height of his popularity was when Doge was at his best.
The American people really do want to cut the size and scope of the federal government.
You can see it.
Look at the government's officially shut down and Trump's fixing everything.
It does suggest, like, why do we need the rest of the government?
Everything has been better the last two weeks.
Can you name one thing in society across the globe that's got worse in the last two weeks?
Companies can't go public.
This is the problem.
Yes, I agree.
But yeah, other than that, well, fortunately, my companies will be good enough to go public whenever they want.
It will be eventually.
But RAMP can be public whenever it wants.
It doesn't need like a timing move and manipulation.
But fundamentally, they'll get fixed.
But the government being shut down doesn't seem to be interfering with the rate of progress.
And I think maybe Americans wake up one day and say wait, why do we need this size federal government?
I actually believe you could probably cut 50 of the federal government ex-military easily.
What does the Commerce Department actually do?
Like literally, I mean, Howard does a lot of work.
He's at the forefront of everything, like negotiating tariff deals.
But, like all the thousands of bureaucrats, what does the department?
Why do we have a Department of Agriculture?
This is actually an interesting question.
Why do we actually have thousands of people?
Probably I haven't looked at it recently, but probably 30000 people work at the Department of Agriculture.
What world does that make sense?
Like even like the state department, there's three or four thousand economic officers posted overseas.
This is like back in the day when you count the ships kind of an artifact of history, where you count the ships showing up at a port and then report back to dc.
This economy is growing, poland's growing.
The uk is not, where obviously you can just log into a bloomberg terminal and track that probably more accurately.
But if Elon couldn't do it to some degree, does it speak to the intractability of actually?
Well, you need political will, but I think one of the things the last two weeks is showing Trump's going to be more popular than ever.
He's literally posting the highest popularity and approval rate of his career right now, and the government shut down.
One of the reasons why there hasn't been political will is when you have sort of a diffuse benefit and concentrated, aggravated people.
Politicians, elected officials are afraid.
So when you cut something, the people who like whatever that program is.
They may only be 1 of the population, but they're very loud and annoying.
And the 99% of the people who benefit are quiet, typically.
But if you can convince people that hey, we don't need all this stuff, then the 99 of people are like hey, why do we need all this stuff?
Why am I paying all these taxes?
Then the 1% you can safely ignore.
And because the 1 have historically been channeling through the legacy media, which is no longer relevant.
You're going to need to find a new megaphone.
Like whether New York Times or the Wall Street Journal writes some attack piece.
Nobody on the Republican side cares anymore.
We've learned that that stuff is just garbage.
It's fake and irrelevant.
And so if you're on the right side of history with the right evidence and the right ideas, you can just ignore the legacy media.
So I think it's going to be a lot easier to cut things.
Do you think Elon and Trump are going to make up in a material way that Elon is going to support the Republican Party?
Oh, yeah.
I think it's obvious.
I mean, I think the Charlie Kirk funeral was like ceremonial.
He must get back into politics in a material way.
I don't know if he'll get back into politics, but he's not going to fund non-conservative parties.
Like, I think that's dead.
I put a stake in the ground in it on the All In podcast.
I think after my comments, I think it was dead anyway.
But I think now they've reconciled, which makes sense.
Like, ideologically, they mostly agree.
I think the debate, the funny thing is the divorce was kind of weird in a sense of Elon's kind of a perfectionist of like why can't you do this?
Why can't you come more faster?
And Trump was like the political realist in that case, where he's like I just don't have the votes in the Senate to do this.
And over time I'll get there.
But you got to give me some rope and you got to give the Secretary of Treasury some rope.
And it was really not a fight about the idea but a fight about the prioritization sequencing timing.
And Trump's a pretty astute politician.
So I would trust his judgment on the timing.
He's pretty aggressive and assertive.
And if he doesn't think he can move that fast, he's probably more right than wrong.
It also just feels like there's this question of do you grow your way out of something or cut your way out of something?
And you have the greatest entrepreneur of all time and you can quintuple.
I mean, I'm making this up, but imagine you can quintuple GDP with AI and everything else, versus cut USAID even more or whatever right.
The growth mentality for the greatest entrepreneur of all time probably makes more sense.
But Yeah, the growth mentality is almost surely right.
The austerity mentality probably doesn't work, which is funny because and ironic, as you point out the greatest entrepreneur of all time should understand the concept of lift.
Growth and lift are basically the same thing.
And you need to create value.
And that growing GDP sustainably, durably is the way to solve America's problems.
Austerity is like a temporary hack.
You're kind of holding everything together and making life painful.
It's kind of like a startup trying to save its cash for the last 12 months, but you're not achieving anything.
By the way, Keith, what's your mental model prediction of what AI will do to GDP?
You know, Tyler Cowen is more conservative and is expressing a mild step up.
Some people are saying, oh, if we actually have AGI, it should be 10% or 20.
Well, I think you can run 4% to 6% durably without inflation, which is magic.
Right.
Yeah.
If you grow that fast, A, real incomes grow.
But B if you have a debt, if you have a deficit.
You can solve these problems without cutting essential services.
And you can probably expand the influence of America across the globe.
What Howard Ludnick articulated to me is basically post-World War II, we sort of intentionally sabotaged our growth and harmonized it with, let's say Europe, people rebuilding, and made an explicit trade-off to do that and then just forgot that 50 60 70 80, 90 years have gone by and that makes no sense.
America should be leading the world and we should be dominating in technology.
We should be dominating in growth, and that creates more and more influence.
So it's profound in every way.
Yeah.
Let's get deeper just on the effects of AI in the economy.
If scaling laws hold to some degree, you know, will it show up in the productivity statistics directly.
You know, what does it do to wages?
Yes, but I do believe in the you know sort of the Baltimore cost thing where, like the limiting step is the most difficult, most human things actually put a constraint on, like AI growth or jobs going away.
I think that is actually true.
Like someone still needs to construct all these power plants or data centers.
And as long as there's manual electricians, as long as maybe you don't need manual architects, but probably need manual plumbing for a while.
Manual electricians.
I don't think robots are building the next data center, at least not right away.
And so that is going to be the constraint.
And so these jobs are not really going to go away.
So if you read the Bommel you know Curse of the Bommel stuff.
I think we're not going to see radical disruption.
We're just going to see the golden age that Trump talked about in his inaugural address.
Yeah.
We just had Sam Altman here last week on the podcast.
I noticed.
We're both investors, obviously.
I wore a much more subtle shirt.
Exactly.
What is your mental model of OpenAI as a company?
What is it doing right now?
How do you sort of see it going forward?
Well, I think there's several things they're doing.
Obviously, it's a phenomenal company.
It's the most important company of the last decade.
I think chat GBT becomes a monopoly.
It's the fastest growing consumer product of all time.
It is transforming how everybody, every normal person basically does their work, runs their life, and so that product alone is a several trillion dollar company.
Then they do all these other things, and some of them may pay commercial dividends, some may pay societal dividends, But ChatGPT alone, there is no competition for.
It's not like Anthropic or all these other companies have any competition for that.
There are vertical applications where some foundational models or some geos where some foundational models may thrive.
And AI may be important enough that even having a vertical application like coding or having a vertical geo application may be worth tens of billions of dollars.
But OpenAI is the few trillion dollar company.
What happens to Google?
Good question.
I know it doesn't show up in all their metrics.
I know they're good at spinning, like, hey, it's not having an effect on this and that.
But if you just survey, you know, walk outside your office and just ask 10 people like how often do you go to Google versus how often do you use ChatGPT?
And yes, maybe you grow both for a while, but I don't use Google for anything.
Like, I can't remember the last time I used Google versus ChatGPT.
Like, it's just so inferior.
Alex, I know you've thought a lot about Google as well.
I know their strategy.
So their strategy is going to be at some point they're going to try to take advantage of all this personal data from your Gmail, from your YouTube videos, from all the different products they have, and then therefore make a much better personalized experience.
And I think the tradition, the company being a conservative institution and a legacy sort of institution, they've moved very slowly on that.
But there is a lot of data there and you could create a very powerful personalized assistant sort of proactive product, and that's what they should build.
The question is can ChatGPT get enough of my prompts over enough period of time that they're creating an equivalent data set about me that allows them to compete on the personalization basis?
And the longer Google waits to ship something like this that's robust the more time ChatGPT has to develop.
You know, sort of my personalized prompt history which can inform the future.
And then they can ship, you know, better products, personal assistants, devices.
So that's the question around devices.
Do you need a device?
Is AI driven by a new computing device?
And who's going to build that?
Obviously, OpenAI made an acquisition to try to get down that path.
Google's been terrible at devices historically.
We'll see if they can get any better, but someone you know, Apple is great at devices but bad at AI.
Someone is going to build a device.
Where are we going to be using, you know, your iPhone as your personal computing device?
Five years out?
Maybe?
Ten years out?
Almost surely not.
Do you know what that device might be?
I personally am a fan of putting something in your ear.
I think, first of all, I believe in the science fiction movie adoption of, like, Mission Impossible.
It's always in his ear.
The glasses have done reasonably well, but, you know, I had Lasix.
I think most people who wear glasses try to get Lasix at some point.
And so I think putting another device here all the time the bar on the value proposition goes up, versus put something in your ear and might actually go down.
There are people with like pendants and necklaces, which have some value.
And you may have multiple.
Instead of having a phone, maybe you have something in your ear and something here.
Something here depends what the use case is, what the ideal form factor is.
There's issues around battery innovation too, like some of the stuff's really hard because you need power, constant power.
Depending on where something's located, it may be very difficult to power it or not.
So i i don't know how to do it, but if i had a vote, if i was running a company that's doing hardware, i tried the year first.
Interesting alex, any reactions to this, either on the on the google side or on the device side?
Yeah, I mean, I think on the Google side.
I mean you and I have talked about this a bunch.
I don't think Google is going to get hit for a long time on the monetization part.
But I agree, like all of the non-monetizing searches go away first.
It's like, you know, how do I get here?
What should I prepare for this interview?
Like all of these things that aren't commerce related.
But like, where do I buy it?
Like, I want to buy a tennis racket right now.
Like, that's Google until it isn't.
Until it isn't, until you say, show me the best five tennis rackets for me.
Oh, yeah, yeah, yeah.
Because like, if you try that right now, Top five bracket choices for me on ChatGPT versus Google search.
Right.
I think even already now, ChatGPT would be better.
Well, it's where it will really be better is.
I kind of think it's like there's impulse buys which won't really be hit by either, because that's just like.
I'm looking at Instagram.
I see something that I shouldn't buy anyway.
And then there's highly, highly considered purchases like buying a house.
We'll get to that later with the door and everything else.
And then in the middle this is something where I think AI eventually will do a phenomenal job which is, like I want this skew, this tennis racket, buy it from me right now at the lowest price.
You're not going to go through google and like look at coupons, like all that crap is going to go away.
You will just go to chat, gpt or to your point like it's possible that the empire strikes back, but like the like all right, i already have my calendar, my gmail, everything else that personalization potentially makes it better, but the execute on this skew and buy it for me.
If ChatGPT gets that going, which I think is one of their top priorities, then like that's going to really steal the monetization engine from Google.
He's like, that's where they make all their money.
I mean, but imagine a couple things.
So first of all, the example.
If you have Gmail, you probably can figure out what tennis rackets I've purchased previously.
I mean, if I bought them in the real world maybe not, but if I bought them online, in my receipts you know they're going to be in my Gmail.
But then the other hand, on ChatGPT, you know, I could say, I'd prompt, like, you know, I'm this ranked tennis player, better at forehand than backhand, blah, blah, blah, blah, blah, you know, et cetera, which rocket's best for me.
And I can't even fathom, like, how to do a Google search that would be something like that.
It's more of like Google has this like complete inventory.
But I think that advantage will not hold for long.
And I think the metrics that they're kind of faking right now is it's like what percentage of our users are using AI.
And that's not using Gemini as a DAU.
I'm sure of that.
It's just like they have, like an AI summary something, something in there, but they're losing all of the free in the freemium sense searches to ChatGPT.
So eventually that's going to catch up with them.
Well, also, ChatGPT is fixing the first sin of the internet, which is they charge subscriptions.
Yeah.
And so, to some extent, you may not have to rebuild an advertising model if your subscription revenue is excellent.
Consumers are basically learning that they should pay for things that create value, which has always been true offline.
Like there's almost nothing you consume offline except oxygen that you don't pay for.
But online, the first generation of internet entrepreneurs assumed you had to make things free.
They sort of equated the marginal cost reduction with the value reduction, and it was just a massive mistake.
And ChatGPT is now fixing that, where people are going to pay for AI products directly, whether it's 200 a month, 20 a month or even 2000 a month.
And yet at the same time, merchants will still pay for traffic.
Yeah, so you can do a hybrid, but then you can offset some of Google's advantages if you're already monetizing users through subscriptions successfully.
Yeah.
Let's talk more broadly about how incumbents are going to be affected.
We just talked about Google.
Keith, I'm curious to hear your thoughts when we look at the next five to 10 years, like how companies like Amazon Meta, Microsoft how do you think they're going to handle?
It's a great question.
I don't know what Amazon's going to do.
It has the selection and the delivery.
I mean, still, there's a fulfillment arc.
One way or the other, there's a fulfillment aspect, which has never been Google's strength.
They've tried various initiatives.
None of them work.
It's not going to be ChatGPT actually fulfilling, most likely.
Well, Amazon, most of their gross profit is AWS.
Yeah, so you have another issue too structurally like maybe they don't even care to some extent at some point.
But I think the fulfillment's very real and Amazon is excellent at fulfillment not that many people are, although e-commerce fulfillment is somewhat distinct from traditional fulfillment.
So we'll see if there's room for innovation there, but they could hold on for a long time of being the reliable delivery mechanism.
You get satisfying, you get a reasonable price and quality experience, and that's good enough.
So maybe that sustains them for a bit.
Microsoft, I don't know.
I think people gave them a lot of credit upfront for their investing in AI, forging this relationship and partnership.
With OpenAI.
Before it was obvious that OpenAI was going to transform all of our lives society industries, etc.
But over the last two years it's not clear that they have been able to preserve that advantage.
And now, if you think about business applications, do you really think that Microsoft has an advantage in business applications?
Not in LinkedIn, not in Word, probably not in Excel.
They're holding onto Excel, but there's a lot of startups you've probably funded a few around here that are AI for Excel and things like that.
Keynote or PowerPoint, I doubt they can hold onto that.
You know cloud revenue.
Sure, per the point about AWS or Google Cloud, but that's not really why Microsoft's valued the way they are.
So I don't know what their advantage is That's going to sustain through the AI wave is going to be.
Well, historically, it's always been a distribution advantage where they've just crushed everybody.
And it's like, you go back to Lotus 1, 2, 3, or whatever, pick your company.
And it's like, they just have this dominant.
Browsers.
They will just they'll clone you, they'll crush you and then they'll distribute the heck out of their shittier product.
Or teams.
Yeah.
Teams is a perfect example.
It's like Zoom had a higher market cap than Exxon, right?
And then they like totally flipped after like COVID reversed.
And Teams is just, but it's actually not because of Exxon, right?
It's because of, it's not even because of COVID restrictions or interest rates.
But they started with an advantage in coding, Copilot, et cetera.
They're losing that.
Cursor or Cognition and maybe others.
But it feels like developers are much more attuned to like, I want good software.
Whereas if you're like an Oompa Loompa at a big company and you're just like you're using Microsoft Office, it's just like you're using Microsoft Office.
Whereas like developer, like really really high-end developers, like of course they're going to use Cursor over, like Microsoft Copilot.
But I wonder if Office even has a future.
Like this is where...
You know, when people write stuff, I mean obviously Microsoft Word was the default way most humans have been writing stuff for like 20 years, although I grew up with WordPerfect.
But are people with the way you know AI writes, ChatGPT writes for you and increasingly better.
And are there specialized versions of that?
Do people draft documents in Word in three, four, five years?
Probably not.
Well, it's also like this classic disruption theory of, like Microsoft Word has overshot the market right.
It's like there are 9 million features in Microsoft Word that I never use.
Like, do I need to make a table of contents generated from my book?
Like, no.
And like to a certain extent, like Google Docs, like that was pilloried when it came out because it's like oh, it doesn't do the table of contents generated or whatever.
But, like, Microsoft Word has overshot the market.
But they do have the distribution, which I think is the hardest part.
It's going to be on everybody's phone or device.
And so, for example, I was considering writing a book.
Everybody's always like, you should write a book.
So I was like, check to keep writing me a book.
And it was a pretty good sort of first job.
That book's not going to get written in Microsoft Word, as far as I can tell.
If it's ever written.
It's crazy to think that for a day, Sam Allman was conceivably going to join Microsoft.
Yeah, for like 24 hours until Vinod and some other friends intervened a fair amount.
I guess I ask that to ask, did Microsoft sort of drop the ball on their relationship?
Like, could they have capitalized in a much bigger way?
Or was it just... I don't know.
You know, the talent...
There's a complexity around talent.
Like you know, individual people.
If there's only 150 people that can build research models successfully, talent's going to have a lot of power.
And if the talent doesn't want to work for Microsoft, there may not be economics there.
I mean, Meta's trying this of, like, can you use economic leverage to force people to work there?
You know, and we'll see what the results are.
It's not a bad idea.
Like, I actually think Mark's clever.
He means more money than most. take the money and use it.
It's like, imagine you're competing in sports.
Mark doesn't really have a salary cap.
So why not try to pay the highest salaries?
Now there are issues when you do that and he's running into some of those, but it's a relatively coherent strategy for Meta to try it.
I just worry, I wonder I shouldn't even say I worry like the moral hazard of it's.
Like I mean, this is kind of what went wrong with like crypto 10.
Yeah.
Where it's like, I'm going to give you tons of money up front.
And normally the way that you build a startup is you build the startup, you work really hard and then at the end you get the Ferrari.
Yeah.
And if you get the Ferrari first, will you still build the hard startup?
And like the people that are in it for the love of the game, they will.
They will.
But then can you tell the difference?
Can you discern the difference?
In sports, it kind of works.
We guarantee contracts in some sports.
But maybe that's because there's such statistical measurements of people's performance.
And a lot of people who are in sports are just so dedicated love of the game whatever, but so passionate about what they do they can't imagine doing anything else.
But I think this could backfire.
But it is a coherent strategy for a company that was losing.
AI race to try something different, leveraging that they make.
Probably other Apple could have done this, but so culturally foreign.
Apple could have competed on dollars.
They made more money than anybody else.
Their profits are greater than Google's revenues or something.
It's something like that.
I haven't done the math recently, but it's pretty comparable.
But Culturally, that just wouldn't work at Apple.
And so it became a non-starter.
But they're gonna have to figure out something or they're gonna be irrelevant at some point too.
Right, once the device question comes into play.
Yes well, that's what's saving Apple right now is the vertical integration required to build a device successfully is something that no other company, at least in the West, knows how to do.
Because you do need software.
You need hardware expertise.
You also need, like, the ability to compete on batteries and chips.
And, like, there's four or five different things you have to be pretty excellent at.
But someone will... figure out a solution at some point.
Well, it feels like they're looking at it.
Like you know, every Samsung phone, when it comes out, has a better camera for, like you know, a week or a year or whatever than Apple.
Or, like you know now, the Samsung phone folds in half or it has all these advanced features that really aren't for the mainstream.
And Apple has always been like, we're going to wait, we're going to make it better.
But like, they're not the first.
And like, AI strikes me as a little bit different than that because number one, it's software.
Um, so it's not like we have to go get the world's greatest AI right now and put it in in day zero.
And this whole, we're gonna wait three years?
I mean, it's just such a lost opportunity.
I'm convinced that, like, traffic fatalities would go down in this country if Siri actually worked.
Right?
Like there are so many things where they could make it better, But they're treating it I mean, at least from the outside in like oh, this is like you know, Samsung has a 400 megapixel camera or something.
We're going to wait on that one and not get it right.
And, like, they just announced, like, you know, why doesn't Siri work?
It's an embarrassment in 2025 when chat GPT is like AGI.
Like I mean maybe not by like current researchers, but like 10 years ago we would have said this is AGI.
And, like, Siri is just as bad as it was in 2015.
It's just remarkable.
Yeah.
Yeah.
Just to close the loop on this Keith, what's your perspective on Meta's sort of durability or defensibility or strategy going forward?
Well, as I mentioned, I think the approach is interesting because when you want any strategy, whether you're a venture capitalist or an entrepreneur, you want to leverage the advantages you have and maximize those.
And so cash is one that Meta has.
And so trying to leverage that's smart, but they still need the ability to ship products.
For Google's weakness has always been they just don't ship products.
Like they have ideas, they have researchers, they have lots of money flushing around.
But when was the last time Google launched an interesting product?
Gmail was pretty good.
Yeah, 2008.
2004.
Yeah, actually, that's right.
So, yeah.
And, you know, when did they do Maps?
Like, 2005?
Something like that.
When did Brett do Maps?
Like, it was something like that.
And then you know they acquired some things like YouTube whatever, but like launched a coherent product.
Now, actually Waymo would in some ways count, but it actually won't help with this problem, as far as I can tell.
But, like, a true... sort of consumer product, I'm not sure they know how to do it.
Right.
That's Google.
And the meta of the question is, how defensible is the graph that they've built?
Well, I don't think the graph is defensible.
I think there are other assets that are.
I think the graph has kind of been weakened by, like TikTok has kind of shown that on social products the graph may certainly is not indispensable to success and may even be a handicap.
Axe, as you've moved from people you follow to a for you feed, which is the default and probably how all of us engage with.
Axe has also made the graph fairly irrelevant.
Well, there's a question people are asking with Sora, which is hey, if your friends can make as good content as professional content makers, which is a big if.
But maybe you want the best of both worlds, which is you want the social and you want the highest quality stuff.
Ideally, but also Reddit.
Like Reddit's a $40 billion market cap company, no graph.
So I think the graph was very valuable, to be clear.
I'm just not sure it's valuable in the future.
Let's get into real estate.
Let's get into Opendoor.
We recently had Kaz on as well.
Why did Opendoor lose its way?
What were the mistakes that were made?
And let's talk about how we're going to figure it out.
Well, there was two.
One was predictable.
Vinod actually warned Eric and me about this in 2015, that real estate has a cyclical nature to it.
And you need to make sure that your cost structure will be acceptable when you hit the lows of that cycle.
So you basically get as many variable costs built into your company culture and as low fixed costs as possible.
And then you don't care.
So real estate, residential real estate, people's intuition on this is very off.
At the low market, like when people think real estate's dead, 4 million homes transact a year.
High in the market, 6.
So you have 4 to 6 million transactions a year.
You need to build your cost structure that you can be break-even or not.
Incredibly unprofitable at 4 million transactions a year.
And Eric and me collectively did not do that from 2015, 2019.
So when the Fed started raising interest rates and it actually did raise interest rates six times in a very compressed period of time, which is the fastest rate of interest rate hikes the company then went from five and a half million transactions a year as a market, as a TAM, to four and immediately started burning money.
An extreme example of this that clarifies my point, I think, is what happened to Airbnb COVID the first month.
Airbnb is a wonderful business.
One of the best network effect businesses, maybe the best of all time.
13% kind of margin, take rate, whatever.
And all of a sudden COVID happens and nobody's traveling anywhere.
Companies had a very bloated cost structure too, but nobody noticed because they were minting money.
Nobody travels.
Guess what?
All that GNA is pure burn.
And they almost went bankrupt until they structured this very complicated deal with Silverlake, which saved the company.
Open Door had that problem, but less excusable.
In real estate, you should take account for the idea that this would happen.
So anyway, basically, that's what happened to Open Door.
Then secondly...
As Eric decided he didn't want to be CEO anymore, the board, for a variety of reasons, promoted this completely mediocre CFO, which is almost always a bad idea to be CEO.
And she went from mediocre to the worst CEO in the planet.
So the company, for three years, did every possible thing you could do wrong.
It still survived, barely, but literally the dumbest possible thing was partnering with agents, shutting down innovation, hiring people overseas, adopting DEI writ large, every possible mistake, stupid-ass capital markets decisions, under-investing in what we call AVM, automated valuation, every possible mistake.
So the good news is you can get like 10x value just by unwinding those mistakes, which Kaz is definitely doing.
You know, even his first month, I think he'll get half of those unwound, maybe even more, like just in one month, because you know faster um, but uh, it's just like literally, the more you dig in, it's kind of like biden um, you know, trying to cover biden.
It's like if i just stopped doing every stupid thing that biden did, like the world would be so much better and like i don't have to really do any innovation, i just have to stop doing stupid.
The immigration borders, the perfect example, like literally on day one.
He's just we're gonna stop like enticing people to come here And all of a sudden, like border crossings, go from like here to here like in 24 hours.
So, like, that's, like, Opendoor.
It's, like, basically border crossings.
Like, we had Biden running the company about as competently.
So what's your wish?
You know in our last episode with Kaz Alex fleshed out kind of his Amazon for Homes thesis why he got so excited about, you know, leading our investment in the company.
What's your, where are you excited?
Well, here's my.
I'll give you the top-down thesis which I've shared publicly.
Before is in 2017, I had dinner with Yuri and Max Levitan.
And Yuri asked this question.
He's like, what's the largest market cap company on the planet in residential real estate?
And I assume there must be something outside the United States.
And that's why he was asking the question.
Turns out at the time, the answer was Zillow at 18 billion.
And it's insane.
The largest asset class period, that of 30.
We've basically been innovating in technology, consumer technology.
If you call it 30 years, like 1995, I'd say to now 30 years.
That in the largest asset class in the world for consumers, that the largest market cap company that would take advantage of any technology would be 18 billion, makes absolutely no sense.
Like, that's like insane.
So our goal is to reinvent the process of buying and selling a home, and if you do that, you're going to be worth hundreds of billions of dollars.
Now it's difficult to do that successfully completely reinventing the process of buying and selling a large asset but it's not impossible.
Um, things that you know ebay did back in 1995 to 2003 applied to homes.
Carvana has mastered this.
Applied to automotive which, for a normal American, there's actually.
Sometimes people are like oh, there's nothing like in common between autos and homes.
But that's often very wealthy people who have like a $40 million home in Palo Alto or Atherton.
And they drive.
You know if they drive at all like 100k car or something like that Tesla or something like that.
Most Americans have a five to 10 ratio, more like 10 now, but like a reasonable ratio between the cost of the value of their car and their home.
So you're only talking about an order of magnitude difference.
And I think that we should be as valuable.
And some of the things we do are very comparable to what Carvana does.
We actually have less competition than Carvana.
Carvana actually has been incredibly successful given that there were very significant competitors that were innovative, that they were competing with.
But it's a plus or minus a $40 billion company.
And if we just get the same multiples on what they do, we'll be worth tens of billions to 50 billion.
That's like the base case.
I want to segue to fintech.
You guys are among two of the best fintech investors and founders, operators in the world.
What is the state of fintech in terms of where are we actually looking for investments and how we think about it?
Keith, why don't you start?
Well, I think there's lots of promising fintech companies.
It's always been difficult.
The reality is I personally have a view that to be successful as a fintech innovation, you want an underwriting advantage and a distribution advantage.
If you have both, then you can build a really epic company.
If you have one, you might be able to build a pretty solid company, a firm which we're both involved in.
Um had both underwriting misprice certain kinds of people were mispriced.
We're gonna figure out a different way to underwrite based upon other things and a distribution very clever distribution hack that other people have now copied, but basically was very innovative at the time and that's why firms you know 25 billion dollar company was still upside um, but i think those are rare to find um.
If you find them, the world's still open for innovation.
It's not like the world's incredibly efficient around financial services.
Uh, We have some very successful ones that have been built over the last five years that now need to infuse more AI, but they're not predicated on AI.
And I actually kind of like that because you could argue there's an AI overinvestment sort of cycle going on.
And arguably one way to kind of create a portfolio that's not as sensitive to AI valuations is financial services innovation, which still requires distribution, and innovation around underwriting.
There's also this kind of question of like there's bits and atoms.
Like you mentioned, vomits cause disease, right?
It's like you know plumbing healthcare, like all of these things that are so atom-centric.
That will be atom-centric for a long time, until we have sentient robots or something.
Whereas every financial services product that I know of, except for like, the delivery of physical gold, ingots like it's all bits.
So there probably is a fair amount of upside for AI, but you still have to get the distribution, which is really hard.
Like consumer fintech products are so hard because, like all of the I mean right now, just all of the economic rent goes to Google or wherever you find it from.
But for the ones that unlock distribution, it's like number one.
You can bring down the variable cost that you were talking about with AI.
And then number two.
It's like there are I think there are so many things right now in the world.
This is kind of my view on AI, where it's like cost is here just for any object, any delivery of service, and value is here.
So if you just keep value here, like you're not trying to change the value equation, but you can bring the cost down now you've unlocked a new market that just didn't exist before.
And it's almost hard to articulate what those are until you see them.
But like, it's like, oh yeah, like people wanted that.
It's like, you know.
Well, Square was a quintessential example of that.
Everybody thought there was no market for Square.
Like, including very smart people, like lots of very smart people that we both know.
Because you couldn't really prove that everybody really wanted to accept like credit card based payments.
And so you actually gave them, real people, the option to do it.
It made it so simple, easy, intuitive that they didn't have to think about it.
And then it's a massive market.
Right, or like I'm on the board of a company called Wise, and Wise has shown that, like the market, this kind of makes sense in retrospect.
But, like the market for real-time delivery of cash is just so much bigger than the market for like, you get it two days later.
Yeah, well, cash out.
This is the monetization strategy beyond cash out.
Yeah.
Cash App makes money now.
The reason why is people will pay for instant, quote-unquote, delivery.
This has always been true in financial services.
By the way, this is the magic behind PayPal's revenue model.
We basically created an instant debit, effectively an instant debit or ACH product back before...
People knew that language.
And then we just charge the fee for the instant receipt of the availability of the capital.
It's like FedEx to financial services.
It's like, you know, Frederick Smith proved this with FedEx.
Yeah, versus UPS.
You pay 32 cents versus $10.
There's priority overnight.
It's like some people need it before 10 a.m.
And, like, it turns out that's true for, like, a large, like, countably infinite number of things.
But I think just in general for, like FinTech, there probably are going to be a lot of other services.
Like the banks, I love something that you tweeted.
I think it was your pinned tweet for a long time.
It's like how to disrupt a market.
Yeah.
Or like pick something with very low NPS.
And like you don't get better by delivering one particular service at that.
It's like, oh, here's a camera that attaches to your phone.
No, nobody wants that.
You want the better, fully integrated service, so you vertically integrate, and this was Opendoor.
You could just say, here's a better AVM, automated valuation model.
Okay, if you really want to get the whole value.
I mean, would you rather be at the heart of it is?
Would you rather be Amazon, which has a very low gross margin on products that they actually store and sell?
Or would you rather be eBay, which has amazing high gross margins but is the shittiest service in the world?
Nobody wants to buy from eBay because you don't know if you're going to get the product on class.
You don't know if Eric Torenberg is going to ship it to me like you want to buy from Amazon.
And Amazon is worth two trillion dollars and eBay is worth like 40 billion dollars.
So like, obviously Amazon is better, but you would misjudge that based on the gross margin classification.
Like, oh, VC is only, like, doing high margin things.
And, like, I think that's one of the things that I really respect about you.
It's like, do something really hard.
It doesn't matter what the gross margin profile is.
It matters, like, how much gross profit are you generating?
This is the worst thing.
There's lots of bad things you learn as an MBA.
Like, it's like, this is the worst one, is, like, the gross margin, especially percentage.
It's one of the reasons why, A, Amazon is successful.
Stripe actually back in the day took this model back before more people understood this and said we only care about the sliver of contribution dollars, not like the percentages.
And everybody else was like, oh, you got to worry about this margin or that margin percentage.
It's just like, are we adding incremental layers of dollars, actual cash?
And that actually works really well.
Yeah.
And so to the extent that VCs have soured on the, or not been not as excited about the category.
Perfect.
Just send them all to us.
Keep being soured.
Financial source, terrible innovation.
It's a very small market.
Nobody likes it.
Well, this is the point that I was getting to.
It's like how many people like their bank?
And like a lot of these, a lot of these companies actually work because of regulatory capture.
Yeah.
Like if it was very easy for Keith and I to start a bank tomorrow.
Yes, distribution is very hard, right.
And underwriting is very hard.
I'm pretty confident, at least in your ability and, to a lesser extent, mine.
Like we would be able to get, we could build a very valuable company, but it's so hard.
Like the regulatory overlay on these things is so high.
And that's part of what makes it challenging because nobody likes Chase.
Yeah.
And there's a saying that I love, which you've heard me use a lot, which is the best companies have hostages, not customers.
And like all the financial services companies, all the incumbent financial services companies, they have hostages.
They don't have customers.
And it just.
It turns out it's very even if you build a better product, a 10 times better product, it's still like the distribution is very, very challenging, but this is what the killer entrepreneurs can do.
It's like you find, and this is why like, you know, new bank did this for Brazil.
Like in many cases, it's geo by geo, just because the regulatory overlay is so high, versus you build a software product.
Like Microsoft Excel is Microsoft Excel for the world.
There's no like Portuguese version of Microsoft Excel that only is sold in Brazil and Portugal.
It's a great opportunity.
It's one of the best investments I've ever made as a company in Europe, uh, called trade Republic.
It's actually better than new bank on any metric actually.
Uh, But it could only be done in Europe.
It's not easy to translate what they do and why it's successful here.
Robinhood's a poor comparison here, but, like, is the closest.
But so you have to kind of arbitrage the G02.
And it's because of the law and regulation.
There's things that are easier, actually, to do in Europe.
There's a reason why Trade Republic's better than Robinhood because in Europe actually it's more permissive certain things.
And then there's things that are much easier to do here.
And so you need someone who understands how to create a product and value prop given the constraints, and where are their gray zones and how does it translate to customer value.
And so that's very difficult.
But there's a lot.
There's a modern generation of financial service innovation.
It's a little under the radar.
I mean, people definitely are paying attention to RAMP.
So, you know, like high-profile company.
But even a company in our portfolio that I've invested in many times, called Avon, most people still don't really know about.
It's a great company.
Another company is called Imprint.
Great company.
Still fairly under the radar.
Competes with two public companies.
Actually, we sort of helped seed fund it back at Affirm.
Back when they were starting the company, Affirm did a corporate, you know sort of investment project.
Well, and that's the thing.
It's like you know software, like I'm very confident that all of the banks cannot build software, will not be able to build software, will not build software.
Let me use Devin.
Yeah.
So that's their best shot.
That's their best shot, but they can't really like if it turns out that software is at the core of everything.
If software is going to eat the world like, why hasn't it eaten financial services?
It has around the margin.
It's like the cool thing for Ramp is like it's like a net new market where it was kind of like there was a shitty version of some corporate card something something, but it's like that wasn't the software.
That was a financial product.
Yeah.
Once you marry it to a software product, it's 10 times better.
Like you have vertically integrated that.
And the incumbents can't do this.
They're still like literally in COBOL often.
And their ability to attract talent is just like zero.
Yeah.
That's why Devin is actually arguably over time a save for them, because they won't need to attract talent.
They can use software to compete with software.
And the software can write COBOL.
Yep.
We'll take the conversation full circle.
We were talking about real estate.
A real estate expert solved the Middle East.
What does it say about the nature of expertise that you know a guy who is a tycoon in real estate and private equity but didn't have a ton of you know, foreign policy expertise you know initially or a trained background in it could be more effective than you know?
Well, at KV, you know, from Vinod on down, we don't believe in experts.
You know Vinod has a whole speech about how no expert has ever created fundamental disruption in any field.
You could argue that maybe in the last 90 years there's one or two exceptions, but the fact that you have to argue about the one or two exceptions suggests he's right.
So, like, for example, I don't like experts.
Like, hiring domain experts in the companies I work with is pretty much a non-starter.
At PayPal we had.
Of the 254 employees we had in Mountain View when we went public two, maybe three, had any expertise in financial services.
At Square, If you included me, which is I'm certainly not a prototypical financial services guy.
Of the first 300 employees, maybe two had any financial services experience.
So it's a pretty common formulation.
Airbnb, I'm pretty sure Brian, Nate, and Joe did not have any hospitality experience.
So I think if you're going to reinvent an industry, you don't want experts.
So the same thing is true in politics.
If you want to solve a problem that's been intractable at least since World War II arguably for hundreds of years, but at least a modern era been intractable You probably don't want anybody who's got expertise in the Middle East.
As Jared was maligned for, he just read books, which is a great idea.
Actually, I talk about this all the time.
People are like, where do you get your contrarian ideas?
I was like, I read books.
There's actually all the greatest thinking of all time is available to anybody.
You just have to read.
And the more you read, the sharper you are, because what Jared talks about and I think is the common formulation, and we definitely apply this at KV specifically and explicitly is asking the right questions.
So what books prepare you to do is to ask questions.
So when Jared went to the Middle East and got dispatched the first time, he actually asked the people who were influential and important in the Middle East like what do you care about and why?
Once you understand that, you can navigate and find solutions.
And that's the same thing we teach.
All of our investments at KV is if you ask the right questions, you'll make the right investment decisions.
So when people join the team at KV, we don't actually look at their output like are the companies great?
We look at the quality of their questions.
Vinod is adamant about this, been adamant about this for like 40 years.
Just the quality of questions tells you everything you need to know.
That's a good place to wrap.
You can just do things.
You can just read books.
Keith, thanks so much.
I'll give you book recommendations next time.
Amazing.
Perfect.
Awesome.
Thanks for having me.
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