BG2Pod Episode 16 Summary: Nuclear Update, AI Fast & Furious, State of VC | BG2 with Bill Gurley & Brad Gerstner

Release Date: September 25, 2024

In Episode 16 of BG2Pod, hosts Brad Gerstner (@altcap) and Bill Gurley (@bgurley) engage in a comprehensive discussion covering the resurgence of nuclear energy, the explosive growth and challenges within the AI sector, and the evolving landscape of venture capital (VC). The conversation delves into the intersection of technology, markets, and investing, providing listeners with valuable insights into current trends and future projections.

1. Nuclear Energy Renaissance

Bill Gurley initiates the conversation by highlighting the surprising surge in interest surrounding nuclear energy:

“The inbound re regarding just nuclear has been off the charts from literally senior policymakers, senators and House members on both sides of the aisle. It really feels like the dam is broke.” [00:35]

Gurley cites recent developments, such as Microsoft’s announcement to reactivate the Three Mile Island facility in collaboration with Constellation Energy Group (CEG). He notes significant investments from tech giants like Oracle and Amazon into small modular reactors (SMRs) and nuclear-powered data centers. This trend signifies a potential "US nuclear renaissance," driven by bipartisan support and the pressing need for clean energy solutions.

Brad Gerstner concurs, emphasizing the shift from traditional utility companies to more innovative hyperscalers as key customers for nuclear startups:

“If the hyperscalers become part of the customer set for the nuclear startups, that may be like 10x better than selling just to utilities alone.” [01:42]

Gerstner underscores the importance of public-private partnerships and praises advocates like Steven Pinker and Elon Musk for reinvigorating the nuclear conversation.

2. AI Infrastructure and Market Demand

The discussion transitions to the AI sector, where Gerstner and Gurley analyze the burgeoning demand for AI infrastructure. Gurley references a Bloomberg headline about OpenAI's capital raising at a $150 billion valuation, highlighting the intense competition and rapid scaling within the industry.

Gerstner points out the unsustainable pace at which AI models like OpenAI's GPT are advancing, leading to a significant strain on computational resources:

“There's this idea that in addition to pre-training we're now going to allow models to reason and think as part of the response process to the prompt.” [15:46]

Gurley elaborates on the challenges of inference constraints and the exponential growth in computational demands, suggesting that the industry might be facing a bottleneck in scaling AI capabilities efficiently:

“I think the world is inference constrained. I think part of the reason for that is that you have new models emerging like this that are going to have machines talking to machines, lots of inference going on in the background.” [16:37]

3. OpenAI's Dominance in Consumer AI

A significant portion of the episode focuses on OpenAI's leading position in the consumer AI market. Gurley references OpenAI's remarkable user growth:

“If you're considering OpenAI something like 200 million weekly mausoleum. That's a number widely reported.” [20:02]

He attributes OpenAI's success to network effects and scale advantages, questioning whether these factors will sustain their dominance against competitors like Meta, Google, and Microsoft. Gerstner adds that features like advanced voice and memory integration are reinforcing OpenAI's market position:

“People are super excited about advanced voice. People that have it love it. You know, I've, especially when I'm driving in a car, I'll have long conversations with ChatGPT.” [21:46]

4. Venture Capital Landscape and Challenges

Shifting gears, Gerstner addresses the current state of the venture capital industry, expressing concerns over excessive capital inflow and its impact on startups:

“Are we overfeeding these startups and then they get so far away from profitability they're spending on projects that if they were trying to get to profitability, they wouldn't spend on that are lower return and then maybe they get stuck.” [35:19]

He compares the modern VC environment to force-feeding geese via gavage tubes to produce foie gras, illustrating the unsustainable growth and high burn rates of startups. Gurley concurs, noting that while late-stage "quasi-public" companies continue to attract substantial investments, early-stage funding remains sluggish outside the AI domain.

5. Valuation and Revenue Concerns

The conversation delves into the valuation metrics of AI companies, particularly OpenAI. Gerstner presents a comparative analysis, aligning OpenAI’s rumored $150 billion valuation with historical benchmarks from Google and Meta:

“OpenAI was able to get there roughly in, you know, in two years from the launch of the ChatGPT in November of 22.” [27:53]

However, he raises concerns about gross margins, especially given the high computational costs associated with AI:

“There's a chance that OpenAI or anyone else in this field's gross margins are more in the 10 or 20% range versus the 57 and 81 that you have here in your charts.” [29:41]

Gurley emphasizes the importance of reducing inference and training costs to achieve sustainable margins, drawing parallels with Amazon Web Services' early-stage challenges:

“What drives valuation, as we've often talked about here, is the future cash flows that those revenues can produce.” [30:44]

6. Impact of Interest Rate Changes

In the concluding segments, Gurley discusses the Federal Reserve's decision to lower interest rates by 50 basis points, analyzing its implications on the economy and investment strategies:

“This gives predictability as companies enter their budget cycles this year. Every company right now is thinking, what can I invest into AI infrastructure next year?” [58:59]

Gerstner responds by observing that while certain sectors like housing have faced minor recessions, the overall economy remains stable. He highlights the elevated forward price-to-earnings (PE) ratios of major tech companies, suggesting cautious optimism tempered by realistic growth expectations:

“If you believe in those growth rates, it looks cheap. But if those growth rates don't show up, then you can expect that these companies are gonna go sideways to down.” [62:36]

7. Final Thoughts and Takeaways

As the episode wraps up, both hosts reflect on the interconnectedness of technology advancements, market dynamics, and investment strategies. Gerstner highlights the necessity for startups to balance capital intake with sustainable growth, while Gurley reiterates the importance of adaptability in navigating the volatile tech landscape.

“VC is harder, it's more competitive. But I think the structural changes that we're seeing are more reversion to the mean than VC is forever bad.” [57:01]

The hosts conclude by reaffirming their commitment to monitoring market trends and supporting innovative ventures poised to drive future growth.

Notable Quotes:

• Brad Gerstner: “Are we overfeeding these startups and then they get so far away from profitability...” [35:19]
• Bill Gurley: “The inbound re regarding just nuclear has been off the charts...” [00:35]
• Brad Gerstner: “If the hyperscalers become part of the customer set for the nuclear startups, that may be like 10x better...” [01:42]
• Bill Gurley: “If you're considering OpenAI something like 200 million weekly mausoleum...” [20:02]
• Brad Gerstner: “I think OpenAI or anyone else in this field's gross margins are more in the 10 or 20% range...” [29:41]
• Bill Gurley: “What drives valuation, as we've often talked about here, is the future cash flows...” [30:44]
• Bill Gurley: “This gives predictability as companies enter their budget cycles this year...” [58:59]
• Brad Gerstner: “VC is harder, it's more competitive. But I think the structural changes that we're seeing are more reversion to the mean...” [57:01]

Conclusion

Episode 16 of BG2Pod offers a nuanced exploration of pivotal sectors shaping today's technological and investment landscapes. From the revitalization of nuclear energy to the relentless expansion of AI and the shifting paradigms within venture capital, Brad Gerstner and Bill Gurley provide listeners with a thorough analysis backed by real-time data and personal expertise. This episode is invaluable for investors, technologists, and entrepreneurs aiming to navigate and capitalize on the evolving market dynamics.