What is J.B. Morgan's right to win in venture capital? We spend $20 billion annually as an organization purchasing technology. We employ 60,000 technologists. We spend $2 billion in AI, and that confluence of factors, I think makes us a very attractive partner to private technology companies. A bit of contrarian take on capital. I'm getting ready for my interview with a CIO of MubaDala Capital. And I believe that if you have enough capital, it's the Sovereign Wealth Fund of United Arab Emirates. If you have enough capital, it becomes its own advantage. Think of it as this glass shaped where you have very few people that are smart investors putting 25 to 250K checks, and then very few people are able to really deploy the balance sheet. And I put J.B. Morgan into this ladder camp that there isn't that many people that could write these huge checks. Definitely capital's an advantage. I think it goes back to this idea of, in general we're seeing in our industry, more of this platform approach where your right to win becomes about all of the different sort of aspects of your organization. And so I think capital's one of them. I do think that at the end of the day, entrepreneurs, and this is sometimes forgotten, these are unique, amazing people. Again, they face typically a lot of adversity. There's been a lot of screening patterns for what makes an incredible entrepreneur, and no one's really been able to figure it out. That's why I guess they're called unicorns or alliers for a reason. I do think that authenticity is really important. So while capital is a big piece of the equation, when you sit face to face with a founder and you're able to say, I purchased your technology, I use it across my organization, I really understand that you can benefit enterprises with what you're doing, I think that entrepreneurs really understand that authenticity. So capital is definitely a piece of the equation. And then I think there's a lot of other aspects, but for us, often coming at it with a buyer's lens is really differentiated. Maybe to pivot to a completely different topic, DPI, it's a hot topic alongside LPs. LPs want DPI. Some of these companies like SpaceX, which I'm thus doing as well as approaching, I think a year 17 or 18 of a private company. And there's this pressure to go public. Do you expect venture capital to continue in the same 10 year fun cycles in the future? And if not, what do you expect to change? We're definitely seeing companies stay private for longer. The typical company today is staying private for about 15 years before going public. A decade ago was seven years. A decade before that, it was five years. If you look at a lot of the canonical companies in the public markets, think of the magnificent seven type companies. Many of them went public in a relatively early stage of their growth trajectory. And a lot of the returns went to public shareholders. Increasingly, we're seeing those companies stay private for longer. As I mentioned, 15 years. And a lot of the values accruing the private markets. Many in the industry are trying to figure out what's the right wrapper to capture that value and what's the right approach. Generally, we're seeing more investors try to take on that multi-stage approach to be able to invest across the full continuum of a private company's life cycle and then potentially even into the public journey. So I definitely think that this is an active dialogue. I think the industry is changing a lot in terms of the size and magnitude of the outcomes as well as the duration that companies are staying private. And so I think definitely there will be an evolution in the industry. It is reshaping the industry as we speak. I don't think anyone has all the answers. And then as a pertain to DPI, it's definitely an important topic for the investor community. We anticipate the coming years being larger than normal IPO years, but concentrated in a small number of very large outlier companies. And so remains to be seen how that flows through. But we do expect there to be more significant DPI in the coming years for the industry than we've seen since the 2021 bonanza period. Expert calls have always been one of the most powerful ways to build conviction, but today investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI led expert calls, their Tejas call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer, purpose built and knowledgeable based information to conduct high quality context stretch conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. 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All of it lives inside the AlphaSense platform, trusted by 75% of the world's top hedge funds alongside filings, broker research, news, and more than 240,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI led expert calls now. The first to see wins, the rest follow. Learn more at alphasense.com slash how I invest. I think about this a bit paradoxically as essentially two different things. One is on the company level, what is the most optimal way? Let's say that they didn't have any pressures from the cap table. How long should they stay private? How long should they stay public? And then there's a second question. You mentioned this wrapper, which is what is the best form factor in which to invest in this kind of company? So you could think of it as two extremes. One is a company going public, as you mentioned, in five years. There's obviously probably a five-year fund for something like that, or if it's 20 years, what do you do? And there's a lot of different evolving solutions for that. One is, of course, companies going public sooner. It's expected. Anthropic and open AI is going public, I believe, in this first five, six years. Obviously, you can't comment on that, but that's in the news. Two is there's these continuation vehicles. They're much more pronounced. On the private equity side, they just passed $110 billion in AUM. And I think some form factor of that is already in venture capital, but I think that's gonna become much more pronounced. And then I think there will be, and I think there is, a use case for this perpetual private company like a Stripe. And the reason for that is twofold. One is all things being equal, you don't wanna be a public company. There's a lot of issues with it. There's costs with it, but I think the biggest issue of being a public company is that you're now reporting on a quarterly basis. This is one of those irreducible things that makes it very difficult for CEO to navigate the company for five to 10 years. So then if you think backwards from that, there's a first principle of questions, should a company ever go public, or are there some companies that don't ever go public? There's certainly companies like SpaceX, like infrastructure companies, that need to go public to raise $100 billion. There's very few companies on the planet that could raise that on a private market. But if you don't need to raise $100 billion, there's still an open question, do you have to go public? It's a very personal decision. We tend to be very founder-centric. Many of the outlier companies, even in the public markets, tend to be founder-driven. And many of these folks have different reasons why they might wanna stay private or eventually access the public markets. We've seen cases where potentially think about a vertical software company, and that vertical that the founder serves happens to have a lot of their customers as public companies. They might like to see one of their software or AI vendors be public themselves because they're accustomed to operating under the sort of public cadence. And so that's one reason that might drive a company to go public. Some companies go public because they think ultimately that will be the lowest cost of capital. There is a cost of capital in the public markets. There's a cost of capital in the private markets. And if you're in a capital-intensive business, you might wanna go for the lowest cost of capital. We've seen certain circumstances where operating privately makes a lot more sense. Maybe you're investing aggressively in acquisition that looks nonsensical at the time because you're spending at very high multiples to buy a company's and put them through your distribution network. And if you were a public company, you'd be scrutinized and questioned by public investors day in and day out. So I think on the first topic, it tends to be a very personal decision. And it's typically made first and foremost by the founder in consultation with their board and their management teams and their employees. And I think there's a lot of different constituents. So we'll see more of different, every type of flavor as it pertains to the perpetual private companies. I do think one thing that we're seeing is a lot more solutions, especially on the secondary side, especially on the development of organized employee tenders. And I think that sort of professionalization of the market will enable the founders to make the best choice for them. So you invest in what's called growth equity. I've asked this question to many different people. Everyone has a different definition of growth equity. What is growth equity? The definition is changing every day. I think the definition of venture capital is changing every day. We're all sort of redefining and seeing new norms when you see companies with no product or just starting off already valued at billions and billions of dollars. These are new concepts. Even the size of the outcomes are much larger than I think any of us ever wrapped our brains around. For us, it's pretty simple, which is we think there are phenomenal early stage investors that invest in, often pre-product, pre-revenues, really off of the strength of a team and an idea. I think we can add the most value post-product market fit when it's clear there's a product that's being distributed that has some amount of resonance with customers. And typically the capital that we invest in the company is being used for growth. Since we last chatted, AI has continued to evolve. It was only just a few weeks ago. What are your up-to-date views on horizontal versus vertical AI and who's gonna win? Vertical or horizontal AI? I feel like everybody is trying to term who's the AI winner and who's the AI loser. I think since we last spoke, the thing that's continued to take the world by storm is the pace at which the foundation model companies are developing commercially and increasing their revenues. You mentioned Anthropic, but it's public that, in one month alone, they added $6 billion of annualized revenues. To contextualize that, $6 billion is the size of one canonical software company. Some of the best software companies in the world with very high- That's just in one month. And that's just in one month. That's just the incremental revenues in that one month. And so I think what that tells us and tells me is the demand for these products is very, very strong. We tend to be compute constrained. I don't think we're demand constrained. We all would love to use AI in our daily lives to do all of the different activities cause us headache today. So I think the revenue opportunity is immense. I do think there's gonna be different winners and losers depending on the use case. I think as it pertains to vertical versus horizontal, we're seeing companies exceed in both. So I don't think there's a unique prescription. I think it comes down to that individual company and the approach that they're taking. What I see is just almost unlimited demand for these types of products. If you're a company, whether you're a vertical AI company or just a company utilizing AI, what becomes valuable? What should companies focus on building in order to stay valuable in this age of AI? What's changing is companies now are selling the work more than the technology itself. The global economy is 110 trillion. If you look at Gartner's definition of worldwide IT spend, that's only five trillion. That's software, hardware, networking devices. So we spend half of our hours in front of our laptops, our desktops, our mobile devices. And yet the monetization is fairly latent. Even if you add up all of the other adjacencies like online advertising and e-commerce, you still only get to just under 10% of the broader economy. Now, when you look at the world's economy, 70% of the world's economy is labor. To succeed today, what's changing a lot is it's not enough to just be the technology that someone's utilizing in their day-in, day-out work. You've got to actually sell the work directly to them and enable those people to sort of level up and start to do other aspects of their jobs and add a lot more value to their lives. And that's changing a lot. I think it's going to drive a lot of monetization and maybe unlock spend pools that are more around labor. And that's really a 14x uplift versus traditional IT budgets. How much is data a moat? So having, being the place where the source of record where people upload their information and the person that gets the customers the quickest, how much does that become itself a moat? You typically have been trained like, hey, you want to be the system of record. You want to be the large, heavy piece of technology that's immovable and that's hard to come out of an organization. You want to be large ACV, annual contract value because that indicates that you're adding a lot of utility to your end customer. I think now instead of these large steam boats, you're seeing more small speed boats. Selling the work is probably becoming more valuable than being the system of record. I don't envision system of records going away, but I think software and these sort of traditional pieces of software are tools. And in the past, humans use those tools. And in the future, you might have AI agents using those tools. And if you disintermediate the tool from the person, that pricing power might erode because agents don't necessarily have that same affinity for one tool versus another and sort of those traditional people oriented aspects of selling technology and selling software might get changed and disintermediated in this new agentic world. So another way, before you wanted to be the CRM, you wanted to be where companies put all their data. Today, you want to be the person either booking, booking the clients or maybe even selling the clients and getting the full sale through some AI system. Like if you look at a very traditional vertical, we all go to restaurants and there's a lot of technology being sold and into restaurants. You know, historically, if you looked at restaurants spend on tech and added up everything, it might only be a few percentage points relative to their overall revenues. But if I can sell you an AI tool that helps you with labor scheduling, that helps you with inventory management, that helps you fill tables on off nights that automatically brings in customers that you know are your loyal repeat customers, that's really valuable. And now I think you're gonna unlock a lot more spend from those restaurants. And then you just sort of copy and paste that throughout all aspects of the economy. And you can see how this could be quite a disruptive and important technology. Last time we chatted, you said, in this market, you could be right that something's expensive and still be wrong about not investing. Talk to me about how you go about valuing companies today. Valuation is always the piece that we try to put last in our analysis, not last because it's unimportant, but because all the other pieces are so critical. So when we think about evaluating investment opportunity, we look at what's the size of the addressable market and is that addressable market growing a lot? We look at is this a market where you can build a market leader and have deep competitive positioning and advantage versus other competitors in your space. Some industries are prone to market leadership and some are more fragmented and it's hard to become that strong market leader. We look at team, the best teams continue to innovate and drive value and they always find a way. Even when they hit roadblocks, they figure out how to increase monetization, how to cross sell their customers, create new products, get advocacy. It's really hard to value those intangibles in a multiple. And then of course, the last thing we look at is sort of what is the valuation that we're paying today relative to the opportunity with this company over the next, call it three to five years. And I would say consistently where investors get things wrong is for the best companies, those companies grow more durably than we all expected and they end up sort of creating a lot more value. What's interesting in the hardest part of evaluation, frankly, is there is a bit of recursive nature to it, which is if a company is an exceptional company and it has a large market and it has a position of market leadership and it has a great team and it continues to grow well in excess of investor expectations, at the end of that, investors will want exposure to that company. And so the multiples will stay durably high and that sort of balance is where valuation becomes more of an art than a science and you really develop a taste for, is this an excellent company? And if it's an excellent company, you can pay a valuation that looks rich in the short run and the long run, it might end up being quite cheap. I think this is really something that's easy to misunderstand and I missed it in Palantir, I was early in Palantir and then went public and it looked like this crazy valuation versus servicing versus the comps. But what's tricky in venture capital is that because every generation is disrupting the last generation, the multiples almost by definition should be different and it's easy to underwrite them to the last generation and think this is expensive, but really you're creating almost a new business model. It's not just a better solution, it's a new model of how to build customers and deliver products. I think the reason why valuation is so tricky is human brain does not do compounding math very well. So when a company is compounding value and growing durably at very high rates and you grow 60% and then 50% and then 40% where you end up after those number of years is way different than the starting position. And so the human brain does one year out very well and maybe even two years out by thinking about the next five years or 10 years, I think that's where a lot of the great investments can be made because these companies that are the excellent ones, where they end up 10 years later is just so different from where they started. I'm curious, what's the biggest lesson that you learned from index? One of the biggest lessons that I learned from index is to keep an incredibly high bar on people and analyze founders very closely. Sometimes it can be that investors put founders and management teams almost in this bucket of, well, they seem good or it's difficult to analyze, but really the best investors develop a taste for finding founders and analyzing all of the podcasts they do and understanding who they are and reading all of the materials they're putting out there if they're writing. I think writing is a great way to really understand a founder, understand is this their life's work? Typically what I've seen is there are these missionary founders and they're driven because they were just put on this planet to solve whatever problem that they're solving and it's not so much that the commercial part's important, but that's because the commercial part feeds into this broader vision and mission that they're trying to build into the world. And so if you back those folks, those tend to be the ones that build the very large companies. And I would say the business that we're in is very much an outlier business. Even the public markets, if you look at the S&P and strip out the top performers, you're left with fairly ordinary performance. If you do the same in a venture capital space, if you invest in a basket of growth-oriented companies and strip out the outliers, you end up with very ordinary performance. So one of the lessons that I've learned throughout my career is to really find those exceptional founders, the ones that tend to be technologists that tend to have a good feel for the commercial side as well, tend to be mission-driven and really wanna build those large and impactful companies. And if you look at venture capital as an asset class, it's the highest performing mean of any asset class in history over the last 56 years, I believe it's somewhere around 18% the mean. But if you look at the median, it's the worst asset class in history because I think it's something like 5%, 6% and also a liquid tied up for a decade plus. Missing those couple of companies or 100 or 200 companies per year makes it a terrible asset class. The typical person has very high loss aversion. A lot of people would rather not lose rather than gain the best firms in the venture capital and growth equity space, understand that you get a lot wrong, but the ones that you get right can drive incredible outperformance for your funds. Do you still see power laws playing a factor in the growth stage or is this an early stage for him? Typically we see not the same amount of loss in the growth space, but we see the winners continuing to drive outperformance in portfolio. I've had people on the podcast, great and famous public investors come on and say they actually think about the public markets as power laws. Maybe this was a thing of the past when Amazon would go public for half a billion dollars and still have this kind of 1000X or Google. Maybe this isn't something in the future, but even public investors look at it from a power loss standpoint. It's a bit like, it just strikes you and you get it, this power law phenomenon or you don't, but I think it's a very powerful concept once you start to understand it and see that a lot of the value being driven in the broader economy is a relatively small number of companies. And I think many of them are in the technology space. Certainly there are great compounders that aren't, but if you look at the absolute dollars, I mean, if you rewind the clock back to 2010 and look at the S&P top 10 companies, three of the top 10 were technology companies and the total market cap was about three trillion. If you look at them today, the market cap of those top 10 companies is about 26 trillion and depending on the day, eight or nine of those are technology companies. So that's very much to your point, the power law in effect and the power law has tended to be in this technology space where you can get companies that are global in nature that reach large swaths of the population and that are adding a ton of utility to everybody's lives and attracting those eyeballs. Actually, I've thought a lot about power laws and how difficult they are to internalize. Actually, I don't think it's a learnable lesson. I don't think you could teach somebody really about the power law. I think it must be experienced. And even when you experience it, you kind of look at it and kind of question what just happened. How is it that nine mind investments went to zero and then this one went up 70 or 100 or 200 acts? It's a very difficult thing to internalize. It's one thing to talk about it. But when you see it on a portfolio level, it's like, holy crap, like this one investment made everything else completely irrelevant and it's just a weird thing. Certainly in our portfolios, we don't see nine of 10 going to zero. We're a little more loss averse than that. But certainly when you see companies work and you see them- But it's still, even at the growth stage, it's still, so they may not go to zero, but they still have, they dwarf. What is misappreciated or underappreciated and you really have to feel that is, again, the human brain does not do compounding well. And so there are companies that are compounding value and maybe they're a four or five X from where you first invested. But if they only two X from there, now all of a sudden they're an eight or 10 X versus where you first invested. And so that small incremental compounding that happens in the outer year strives such value to your original investment. And once you sort of like your favorite pair of jeans or a shirt, like once you've worn that, you start to look for that again in your investments. I think people also have a hard time grasping TAM five years ago, a trillion dollar company seemed impossible and like broke the laws of physics. And now there's probably eight or nine trillion dollar companies. And now people are saying, well, this company might be 10 trillion. And then people say, no, that's impossible. As if it breaks the laws of physics, people just an order of magnitude underappreciate the total addressable market, especially in these AI wars where you have essentially these companies, we talked about vertical and horizontal, but something like Anthropic and open AI, even Google, Gemini or Croc, they're both going horizontal and vertical. And there's never been a technology that goes both penetrates deep and across the entire market. When I was coming up in the industry, I was given really interesting piece of advice from mentor of mine and they said, Rewind the clock and imagining you were looking at Amazon in the 90s, right? And if you were evaluating that as a potential investment opportunity and you were a well-trained analyst, you'd probably say, what's the total addressable market for books and what percentage of that is likely to be sold online and what percentage could a market leader get of the market for online books? And you'd create some sort of valuation and some sort of expectation for the ceiling that that company could become based on revenues or EBITDA or net income. And then you'd be totally wrong because the market would be not just books, it would be all of e-commerce. And then you do the same exercise and you'd say, well, what are all the different categories? And of course you'd start to exclude, well, it's hard to sell cars online, right? And it's hard to sell all of these different sort of large capital goods online. And you'd do, okay, well, what is the true addressable market and how much of that could go online and what could be this company's relative position among those markets? And you'd get a new, much larger amount of revenues and EBITDA and net income. And then you'd say, wait a second, this company is also selling IT, right? Through AWS and what's the market for that? And all of a sudden there's also an advertisement business and on and on and on and on. And so to your point, the best company is what I found is they find a way and they continue to be innovative and they have these cultures of new product development. And it's very hard to understand how that compounds and how sometimes these puzzle pieces fit together to make the whole bigger than the sum of the parts. Maybe it's even incalculable. You didn't really know, no one could really know what Amazon would end up at. The one thing you did know, and you could underwrite is Jeff Bezos, is the founder. And I think people are starting to realize that founders not only matter at the seed series, A series, B, but founders actually matter all the way to even a public company. If you think about what is the one thing that investment bankers can't go in and look in the spreadsheet, it's basically vision and leadership. Taste for the vision and leadership and culture side is a differentiator. Increasingly, as you look at, access to management teams and a deep understanding of this mission is also critical. And those are things that are harder to replicate than a spreadsheet or data analysis. A lot of that is increasingly becoming commoditized and with AI will become more commoditized in the future. But sitting face to face with the founder, looking them in the eyes, understanding the mission that they have and how these pieces fit together, that's often can be misunderstood and underappreciated. One of the most interesting founder models, certainly of our generation, Elon Musk. And one of the things that I think he's actually productized is he now starts with the mission, something that is physically possible, but seems impossible, and then starts announcing it and then builds the management team and builds the people that'll come in through that mission. So he realized this very recursive aspect, which is the founder himself or herself could be the one that actually amalgamates resources. So why not just start with the grand mission upfront and then build the team around that? And he's done that now. He's gonna be designing his own chips. He's now talking about creating Dyson swarms that are gonna go over the sun and basically solve solar energy. But he starts with this like crazy audacious goal and then he attracts the talent to solve the problem. So it's almost like he wills it into existence. Talent is an incredibly scarce resource and increasingly there's this war for talent that permeates through every single company. And so I think the founder's mission becomes a differentiator. The most talented people tend to be attracted by the mission and going on this journey is important. Of course, people want to make sure that they are renumerated and compensated well for what they're doing when you can get that sort of talent vortex going and also developing the right culture, a culture that is high performance, that's about innovation. I think that's incredibly important. And again, a bit recursive, but that tastes for understanding who are the founders who can attract those best people and who are the founders that understand the things that they can do and the things that they can't do and sort of have the ability to have that humility around, if you're a founder trying to do every aspect of the role, sales, marketing, product, all of the HR, like that's not gonna work. Hindsight is 2020, but now looking back roughly a year, year and a half ago, we had these crazy AI talent wars where people were getting, I think the biggest number that I heard is a billion to a billion and a half, assigning bonus, essentially like Ronaldo or Messi to come to these large companies like Meta, OpenAI and others. Was this the right strategy in retrospect or was this just crazy and just something that stopped for good measure? When you look at AI as a technology, what's unique about it is you've got some of the best practitioners who are truly academics in nature at the frontier because a lot of the value here is it being at the frontier of research and falling behind even some small percentage, 3% off the frontier or 1% or maybe people would argue it's even a smaller differential than that can be catastrophic for your company. On the flip side, those folks tend to be quite unique talents. From what I've seen, it's not just about compensation, it's about fostering the right environment for those unique types of personalities to thrive. And then you need to marry those unique research capabilities with commercialization. And so I think the organizations within the AI world that have done the best tend to understand, okay, you have to stay at the frontier and at the cutting edge of research. And then you also need to have the right minds to commercialize those products. And that's very unique. That's almost bringing like a left brain, right brain together. Not many organizations have figured out how to make that recipe perfect. If you go back in time to when you had just graduated college and you could give younger pairs one piece of timeless advice that would have either accelerated your career helped you avoid cost of mistakes. What would that one piece of timeless advice be? One piece of timeless advice that I got time in again and was very difficult to hear at that age was be patient. These things kind of move in tenure cycles, especially, you know, shifts in the world and technology shifts. And so it's all about compounding, compounding your knowledge, compounding who you put yourself around, compounding doing the small things a little bit better each day. And you might not see the immediate impact in three months, six months, even a year, but where you end up in seven or eight years because you're on that journey and you're getting the inputs right, the outputs will definitely come. And so I think that patience, especially in today's world is really hard. We all want immediacy and we all want immediate results. And sometimes it's getting the inputs right and letting the compounding take care of itself. What's compounded the most for you over your career? It's knowledge and relationships in our space. So much is trust based. And so you might work with another investor. You might work with a management team or a founder and you work with them on one project. And, you know, maybe it's okay. Maybe it's a social outcome and how you handle yourself in those situations. And when you look people in the eye and you do what you say you're gonna do and you're there for people in the tough moments, it's easy to be there in the great moments when companies are, you know, growing exponentially and growing month in month out. But when you're there in those not as successful moments, people remember that. And there's a huge amount of compounding in those relationships because people in the tech space where we can't help it, we're just obsessed with this space and we all love it. And I think everyone in the ecosystem wants to see the whole ecosystem thrive and continue to grow. And so what you put into it is what you take out of it. Well, Paris has been an absolute masterclass. Thanks so much for jumping on the podcast and looking forward to doing this again soon. Yeah, likewise. If you found this conversation valuable, please click follow how I invest so that you don't miss the next episode with the world's top investors.
