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How I Invest with David Weisburd
E371: Midas List VC: Why AI Models Will NOT Become Commodities
00:28:43
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- [00:00]
Jason Calacanis
Hans, you've been on the Midas list several times. You're one of the top VCs in Silicon Valley. And several years ago you had a chance to invest into OpenAI and Anthropic. You chose Anthropic. What made you choose to invest in Anthropic at the time?
- [00:16]
Hans Tung
I've been a consumer investor most of my life because the era I've been in where as an investor overlapped with the rise of mobile Internet, not only here in the US but also in Asia. And so it's very easy for people who make money from the things that have done serve you well to continue the same paradigm. So when it comes to think, OpenAI and Anthropic both were amazing companies at the time, this is 2024. People would assume that I would just pick the biggest consumer play at that time, AI and the fastest growing consumer play ever. But with Anthropic, what we saw was something that was to us very interesting and to me personally, a consumer Internet kind of signal that wasn't obvious to people. The API business for anthropic in 2024 was their smallest business in terms of revenue size. But what is interesting about that business, you can see a lot of developers pinging Claude for codes for things and Cursor and lovable and others are growing rapidly. On top of that, for someone who's more of an aspiring historian, remember intel inside what Google did with Yahoo's traffic and so forth being embedded in something else and get the benefit of the crowd, keep on ping you for things over time you can imagine, as I did, that cloud will get quote unquote smarter because of different folks, different developers in different verticals asking them for codes. Each one needs to be tailored over time, tailored more towards that vertical. And within enterprises you can see people ping stuff on different functions, whether it's marketing or product design or coding or security, what have you. And cloud will understand better and better what people are asking for for that particular function. So when you that over a thousand, ten thousand, a million X, you're more likely to generate a positive feedback loop that will help you to get better at delivering that kind of benefits to the users. And this is what I saw with TikTok, this is what I saw with Airbnb. All the best kind of consumer in the company over the last 10, 15, 20 years has that positive feedback loop that make them build a moat from the wisdom of the crowd and the feedback from the crowd and reacting to what people are asking for. And we saw that with Anthropic was OpenAI was being doing a bunch of different things and it was building empire, which is great, good for them. But Anthropic is very focused on developer. When we decided investing in Anthropic, Deepsea just came out literally a few days earlier. And the token cost on Deepseak is a lot cheaper. So if the token cost in the US models close models are more expensive, you have to take that to generate a lot of value. And what's the best value you can generate in economy like in the United States? IT is building B2B applications for enterprise use.
- [02:52]
Jason Calacanis
And full disclosure, I'm also an investor. My thesis was around B2B versus B2C. But what you're essentially saying is what you saw in Anthropic was that it was using its own recursive improvement in the code to basically improve the system. Is that what you're saying?
- [03:06]
Hans Tung
Right. And the network effect that was creating with all the developers keep on using it now a lot of people end up, you know, 20, 30 years ago used Yahoo because Google embedded inside Yahoo just getting smarter and smarter about what people were searching for. So Yahoo was doing many different things. But what was most strategic at that point in time it went O was search wasn't obvious at the time. Yahoo was doing so many things, mail and you know, you can do whatever you can think of today. Yahoo had it back then. But the single most important thing that people back then really, really wanted was search. And Google nailed that as part of Yahoo and Bing tried to do this, you know, 10 years later it just, you know, it's too late. Even though Bing was great, amazing engineers, great model, but a great algorithm. But it didn't have the feedback loop and the network effect that Google had as part of Yahoo initially and then when it's been out, continued to be able to capitalize on that. So those are kind of, that just remind me a lot. This anthropic could have a chance to be, you know, hopefully bigger than the open air. Who know how long it'll take, but it's approach they have makes sense.
- [04:01]
Jason Calacanis
And obviously I love Anthropic but I'm always skeptical when people talk about these soft things like values or alignment, all these things, these are ultimately for profits. What does it mean when you say that? Anthropic?
- [04:14]
Hans Tung
Let me give you another example. Airbnb, March 2020. I was on a panel, not an amazing publication with amazing journalists. Had four of us on the other three. The topic of the panel, future of travel in April 2020 so great timing, great timing. The other three understandably poo pooed Airbnb poo poo travel. But come on, that was one point in time. At some point Covid is going to go away. Who know how long it would take? But it was one point in time. And even back then is there a chance for Airbnb to survive? What could Airbnb do in that time period? Not only how long Covid will last. And when the question was posed to me, I said, you know, staycation could be a thing. I know from first principles. Most consumers, especially Americans cannot be cooped up in house for 2, 3, 4, 5 months at a time. People need a place to go. Sure they cannot fly to Paris, to London anymore, but people can drive. We all have cars going, driving 50 miles now 100 miles, 200 miles will get some place where you can find place to get something different. Now who in that world can quickly pivot and have new inventory and supply doesn't get different places, different location. That was popular before. Only Airbnb can do that. You cannot just build hotel like that that quickly so they have a chance to do something that other people cannot do and provide for a pent up users who really needed it. Who knows if Airbnb can execute, but if everybody get pulled off, it will be done. Literally two days later every made announcement had funding from Silver Lake in convertible note and then all the reservations were canceled so that consumers benefited from not being on the hook to pay for these things. And Airbnb used that money to pay the host for the cancellations to keep them in the business that had to let go. Unfortunately 25% of employees at the same time Airbnb went out of their way to help come up with a book all the employees who were unfortunately let go and help to find job. Now that people can work remotely in that process, everything that happened reflect the ethos of Brian Chesky. And nobody in the history of travel had ever done that before. So when we talk about why does values matter, we're talking about dollars and cents and zeros and ones. That's why it matters. And moment like that builds kind of a, in a practical terms, loyalty and trust that you just won't be able to get easily anywhere else, anytime else.
- [06:29]
Jason Calacanis
This is why I have several IPOs coming out also in SpaceX and Cerebras. And although I'm excited for them to finally go public, I do have this skepticism on the public markets and the inherent corruption of the long term value of the company giving the quarterly financials do you see that evolving or is there any way to solve this issue of going public while also thinking long term?
- [06:53]
Hans Tung
That's a good question. I'm not sure I'm the best person to answer that. You can ask other CIOs about that. Having gone through 6, 7 IPOs already, it's really not easy. The grind of going through every quarter and focus on the question you're going to get every quarter on those earning calls. The pressure is very, very high and it takes a lot of time to do each one of them well, which is time taken away from running your business, making on their best. I think the best person I can think of that can manage that and have the sort of the mental fortitude and this is not a earth shattering answer is Jensen Huang. I literally remember him 2019 in Kotu's East West Summit where he talks about why GPUs matter and why GPU makes sense for the different kind of verticals that they're in. This is way before AI and before COVID The way he talks about things and the way he thought about the world, the way he was being willing to make his bed and be lonely for 15 years doing that, that is a completely different world. And be able to know that you're right, other people are actually going to be wrong and be able to hold up you for 15 years like that when it's kind of lonely, no one care about you is something that just is out of is very unusual. And to see someone like that with similar background as me, born in Taiwan, grew up outside of the US and then came to the US and had the chance to go to the best schools in the US and really benefit from the American system and get back as building the largest market cap company in the world as American, naturalized American. It is just extremely inspiring. And that's a great story for any immigrant who come to this great country for that kind of opportunity. But it's a lonely journey. And when I look at myself, my career with places I've been to, a lot of choices are not popular, not understood at the time. But you got to have that mental fortitude to march to a different beat. And that's the hardest thing. A lot of people buy high, sell low, chase the latest thing. Even I did that as early stage in my career doing whatever was the hardest thing at the time. Didn't realize that that does, that does not work. You got to be able to chart your own path and have a folder to do that. So you know it's very hard to do that in the current environment, it takes a different kind of CEO to make that work.
- [08:52]
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- [10:37]
Jason Calacanis
howi invest the only example that I could really think of is Jeff Bezos. The reason Jeff Bezos made it work is he started from the very beginning. He, you know Mike Maples talked about this, how he picked his LPs for the first couple of funds. He said you need to find your championship. Some people focus too much on selling and not enough on picking who your right partners are. And I think Bezos did it from the beginning. He hired the people around him from the beginning. The antithesis of this was actually Facebook. If you remember. I got to sit down with Roger McNamee from Elevation. He sat me down in the chair where convinced Mark Zuckerberg not to take the billion dollar deal. Everybody around Mark Zuckerberg let him take the deal and he fired most of those people.
- [11:20]
Hans Tung
I know some of Them were my friends. I'm not gonna name names.
- [11:24]
Jason Calacanis
It's as much as a financial thing,
- [11:25]
AlphaSense Announcer
it's a cultural thing and I think
- [11:27]
Hans Tung
there's also alignment again.
- [11:28]
AlphaSense Announcer
Well, there's also a
- [11:31]
Jason Calacanis
mental aspect to it. What does that mean? Why is it that I'm also a first generation immigrant? Why is it that immigrants have that much power and that have that much success in Silicon Valley despite all the things going against them? I think one of them is being different and being an other cannot be right.
- [11:48]
Hans Tung
You have a feeling and a lot of people, you grow up in the environment you became comfortable with. To leave that place of comfort where everything's familiar to you, to go to something completely different and you can immediately feel you're an outsider, you're the other and try to see through that and analyze that and figure out how to fit in, but how to also be different by being able to step out, not training, doing that. And that's why I like Gladwell's books. 10,000 hours, you have that training when you were 13. You're 10 to all the way when you have to work, you have 10,000 hours of thinking that you're different. But how do you turn that into a vantage that is invaluable to work in any environment? That's tough, that's unfamiliar, where your view is minority point of view.
- [12:24]
Jason Calacanis
50% was the last statistic that I saw in terms of first or second generation immigrants venture funded. And then you add to that the teal ism about human beings are so mimetic and so so into pleasing others and making other people feel good that you almost have to be neurodivergent in order to go against the grain. So now you have 50%. Now you have. I'm not going to ask you for a percentage of neurodivergent founders, but some percentage of that and then what's left? Other obviously modes of thinking and other types of diversity as well outside of just, just being an immigrant. Then the question becomes can a regular person start a $100 billion company with no trauma, with no background, with no otherness in their past? And I'm not sure that that's possible.
- [13:04]
Hans Tung
I try to think that you mentioned this.
- [13:06]
Jason Calacanis
Any normal founders in your portfolio who have.
- [13:09]
Hans Tung
I think a normal founder can get to that. Half a billion, 200 maybe branches. Billion in branches. Also different. You put up your bed, you're a hope for a stranger that does not go and then have the wisdom to know that's right. When the first time I heard about it going to YC I'm like, oh, that's the stupidest idea ever. But you see that how the world changes too. That's that. Okay, okay. I was wrong before you got to me changes. We end up still investing him later. So thank God we are. You gotta have the a thick face to say, yeah, I was wrong and we got it. We gotta evolve and be able to iterate. That is also extremely important. And corollary to that is that yes, to be different, give you an edge, but also are you intellectually honest? It's not about pride, it's about figuring out look everything from first principles. What did I miss before? How does that change the way I think about things? Let's change the original assumptions to see what does the output look like.
- [14:02]
Jason Calacanis
The second time I had a fascinating conversation with Eric Scott, who is a founders fund.
- [14:07]
Hans Tung
Yeah.
- [14:08]
Jason Calacanis
And he he explained and within Founders Fund, they have this unique ability to look at every round from complete first principles. In other words, there are companies where you were wrong to pass on the seed. You were right.
- [14:20]
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- [17:38]
Jason Calacanis
You're right to pass on the B. And then you were wrong again. And just the ability to constantly reevaluate your priors and think not in a deterministic manner, but in a probabilistic manner. Most species can't grasp their head.
- [17:51]
Hans Tung
I mean the common theme these days is, you know, power lot. And that's not rocket science. You know, we're in a business of hitting home runs ideally, you know, but base loaded. So it's a slogan position, not matter. But how do you reconcile that with being stuff early and a very healthy ownership level? And a lot of times you have healthy ownership and stuff that's more second tier, not the best tier. And so when you have a double down the best tier companies versus find the next, you know, second tier companies, but you own a lot and tell people you're great early stage investor, how do you reconcile those two? It is not the easiest thing and for me, I'm not ashamed to admit it. I don't have the highest ownership in the companies that you mentioned are great names, but I feel like when they're early enough we gotta be in them for the right reasons. And I wish I can put more money in them but you know, we have the partnership to talk about all these kind of issues and you know, in the previous era of thinking putting having own more in order to company is better these days because some of the companies like on Watkin can be so much bigger. You almost have to see that, okay, these are the best companies and being in them is important and we have to pile more money in. We should because the upside from the point of second entry, third entry is still like 10x. So you got to do that. And that is not easy for most people to admit that that's what you should be doing.
- [19:03]
Jason Calacanis
We're over 300 episodes into this podcast and early on I used to ask this question. People would answer the same, same way. And then after a while I still didn't understand it, but I stopped asking it. The question is people always talk about your fund size, is your strategy and they talk a lot about ownership. But why does it not just come down to valuation? I understand you can't just invest $25,000 and hope it 100x's but it seemed like everybody was just using different terminology to back into being valuation sensitive at the early stage. Why do people talk about it in terms of ownership and fund construction? Why do they overcomplicate what I think is a fairly straightforward thing because it's
- [19:41]
Hans Tung
so hard to have winners. And when you have winners, at least at that point in time, a lot of LPs ask what is your ownership level. So out of 10 bets, 15 bets or 20 bets, you got one or two right, and you own 20% each and ends up being, you know, not 100x but 500x or a thousandx. As an early, very early seed investor, then the math works out.
- [19:59]
Jason Calacanis
But isn't that backwards looking in that if you just had 30 companies instead of 15 and you own 10% instead of 20%, isn't that the same thing outside of just trying to recreate this analogy where you would know the one company that you should own more?
- [20:10]
Hans Tung
Right, you could do that. But the challenge is that are you sure your 15 really capture enough diversity to give you a chance to hit the one that's really big? 30 seem to give you higher chance of at least hitting one of them big. So if you want to hit 30, then you also want to make sure you own enough each one of the 30, which means that entry price has to be lower to give you a chance to do that if the font size is fixed. So I can see the argument and, and I can't say I'm a great seed investor because it's not how I do a living, even though like Xiaomi and Rednote and some of the stuff that I got in it was below $100 million in valuation and it ends up making a lot of money if it ends up being big. So I can see the argument what you have shared, but it is not easy to find stuff that really works until a little bit later. And having the flexibility to do that is very, very important in my mind. And also knowing where to hunt, where the world's heading, therefore you got to spend more time doing that is a luxury that a lot of people don't want to try to bet on because they don't know what could be big, what could be interesting. So end up spreading the bat.
- [21:05]
Jason Calacanis
Everyone's trying to figure out who's going to win in the world of AI. In terms of AI native apps, how do you build for this constantly evolving LLMs?
- [21:15]
Hans Tung
It's very, very difficult. And I think a lot of founders out there who are AI native companies constantly think about that. And that's probably the more reason, as you can imagine, keep them up at night when you want to be on the token path. If the models are improving, your product builds on top of that, as Models, events. Your product also gets a lot better and generate a lot of value like a cursor, like livable and so forth for coding. But the worry is that if cloud and cloud code and cloud cowork gets so much better, then what is room that is left available for you to do to that value? One way in theory is that the adoption at the user level vary the people more technical, the people a lot less technical. So if you simplify the UI and reach more mass users, mass market users, there's a chance you can stay ahead of the UI of a more something more technical from cloud possible. Another way is that you actually own a system of records for data, what is transactions, content, what have you. Another way is that you actually make the final buy and sell decisions, risking the balance sheet of individual, household or enterprise and therefore don't want to touch that kind of balance sheet risk. So these are ways I can think of. And then lastly have all the dominology, something that's more regulated, all the compliance factors and so forth. And elements don't want to spend time doing that. Actually I think about this and now one more physical AI. Is it possible? Because in physical AI one can argue it's not easy to have one model that rules at all, one relay rules at all. Therefore in different situations can you exist where it's harder for elements to go after you. These are the things I can think of today. But you know, a year from now, two years, a month, three years from now, who knows. And that's the best guess we can come with at the current moment in time.
- [22:50]
Jason Calacanis
Physical AI blows my mind. What's exciting to you about physical AI?
- [22:53]
Hans Tung
Physical AI it definitely lacks behind software AI and in the US when you still have the best engineers in the world, want to come here to build amazing companies and 70% of US economy is tied to services. And it doesn't take a rocket scientist to know that serving the developers build B2B enterprise applications is the most value generating activity in a service oriented economy. But the rest of the world is not like that. In the rest of the world is over 90% of GDP outside of us is tied to physical industries. And therefore if you also think that the second rule not like they have one model that rules at all, then for each different kind of physical industry, there may be different models that can emerge that works for that industry. At least there's a shorter path to commercialization that's less capital intensive. Get there. You know, God bless Latune for coming up with something interesting and big and he could still do that or world models or PI. But outside of that more likely is going to be around the world would be smaller models for specific things. And that give more people a chance to win. And that's what to me is exciting for Ventura as well.
- [23:55]
Jason Calacanis
And what have you turned 180 degrees
- [23:58]
Hans Tung
on recently over the last 20 years? I went to Asia. I went to China in 2005 when it was not obvious thing to do. I came back with my wife in 2013 when China was hot and people in China were telling me why are you leaving? And then from 2013 to 2018, I rode the consumer Internet wave here in the US and became an investor in something like Airbnb and Peloton and so forth. But from 2018 to 2013 it was hard. It was hard to be a consumer investor and find stuff that worked. We tried fintech, we tried hardware. It's just hard time. But 2023 to now with AI it becomes very, very interesting. And thank God I can apply what I learned from consumer Internet to investing in anthropic. So picking company that can be category winner. I think always be kind of be my thing. I may not have the knowledge in each era to know what makes sense that most in time in terms of the specific knowledge. That's why you have a partnership that works together. I'm very thankful to have colleagues on our infrastructure side who have more domain knowledge than I do. And I bring different perspective to the table. And as a team, our goal is to make decisions better than what individually each one of us can be.
- [24:59]
Jason Calacanis
Maybe you could double click on what did you learn about being a consumer investor that made you discover anthropic.
- [25:06]
Hans Tung
As a consumer investor you want to have find that positive feedback loop that could eventually lead to a network network effect. And when anthropic the fact that some developers were using can get smarter from smart people using it what the purpose was for and that feedback loop I saw that with TikTok I invest musically encouraged them to get sold Everybody under The Sun, Facebook, YouTube, Microsoft, Apple, everybody passed on musically. The founder actually preferred to sell to American company and nobody wanted it. And ByteDance was strategic. They wanted to go global. So they acquired Musical Ly and seeing what the TikTok algorithm did for musical ly as they became one app and TikTok algorithm be able to just look at what you do with each video and take that figure out build models to figure out what kind of user you could be. And therefore other users who have a similar profile would the would end up choosing something similar to want to look at and use that to continue to refine a model of who you are as a user, that kind of approach actually could make sense in the B2B world. And anthropic was probably the best at leveraging that to figure out what users are among the four and therefore leverage the positive feedback boot without eventually creating a networking effect.
- [26:15]
Jason Calacanis
You figured out that Anthropic and LLMs were a network effect business.
- [26:18]
Hans Tung
If I did use a research failure
- [26:21]
Jason Calacanis
and it thought it was all about gaining users and scale, scale, scale, scale, scale, arpu, all those things.
- [26:26]
Hans Tung
Right.
- [26:27]
Jason Calacanis
Anthropic was about getting to be the best system for a lot of time. For a long time, people thought that this idea of benchmaxing and being the best on the benchmarks was a fallacy. But if you were in the innermost loop of the training data and you had that as a sustainable competitive advantage, this assumption that all the loops are just commodities was a false time. Right.
- [26:45]
Hans Tung
And he knows very well. Two years ago, everyone thought elements would be commoditized. There's so many models worldwide that it'll be hard to differentiate. Everybody can match each other and jump over each other in terms of benchmarks, clearly that's not the case.
- [26:56]
Jason Calacanis
You started a few of your own companies in your early 2000s. Does that still affect how you invested?
- [27:00]
Hans Tung
I was a failed founder twice, co founder twice, and that was a very humbling experience. At the same time, it just taught me so much of what's it like to walk in the shoes of being a founder and all the emotions and the things that we missed, the things we learned, some decisions that should have done differently in hindsight or all that training. If I didn't have that, there was zero chance in hell I would have been a successful investor. So that's why when we invest in companies, I also like founders who did not make it work the first time or a small outcome the first time. So they are very hungry to take all the lessons they have. To make it work a second time or a third time. And then I fail five times, six times, maybe that's not the right thing for you to do, but it's just see how people react, do things that didn't go well and learn from that is extremely important to know this person can go long.
- [27:52]
Jason Calacanis
This kind of ties in with what we're talking earlier about. But as OpenAI and anthropic and Grok and Gemini get bigger and more efficient and smarter, what other themes are you excited about? That leverage the growth and improvements of
- [28:06]
Hans Tung
LLMs, I mean Elon has done with his companies combined to one. Now you see Amazon buying Globalstar connecting what's on the ground here to what's out there through satellite that is going to become a paradigm to compete in going forward. Those two systems are obvious. I'm very curious who's going to be number three and even a number three player in that industry can be enormous outcome. So that's a very capital intensive business, not the era we play in. But I'm very curious it will be a number three player.
- [28:37]
Jason Calacanis
Jensen Wang just talked about this. The four different layers of the AI stack, everybody's focused on the LLM stack. There's obviously the app stack, there's the chip stack, there's the energy to create the chips. Those are the four stacks. Correct.
- [28:50]
Hans Tung
And energy minds people talk about on X. But for American government or economy we're not doing enough to improve that and in the long run that's going to make a huge difference on the upside we can get to. So it will be very interesting to see how we do it. But I also will say that how us how we build our strength and our alliance with Japan, with other countries that are stronger than lasting manufacturing to also may have better more efficient energy sources where utilization we got to figure out a way to partner more with other countries to give us the best advantage as well.
- [29:24]
Jason Calacanis
What's your information diet look like today?
- [29:27]
Hans Tung
I'm not someone who listens to a lot of podcasts. I should but I don't. What fascinates me when I when I look at stuff that I want to consume is a lot of history biographies and videos. One of the ones I like the most is Sarah Payne from War College. The way she analyzes all the geopolitics and the historical battles and wars and rise and fall of regions fascinate me. I'm always having gone to Stanford and really love humanities and love studying the Renaissance, age of scientific revolution, age of discovery, all that thing. It just it's so interesting to me to see whatever you have today. Sure. Even the Roman Empire, even the great British Empire, everything rise and fall. How do you learn from that to help us to be able to sustain the vantage we have today and build on that so we don't end up being the high point of our system. Those are the things that to me are more enduring and more interesting and that really keep me going and apply what I see there to what I see every single day because I feel those are instances of underlying principles that can be patterns you can detect over a longer period of human history. You're talking about thousands of years, if not tens of thousands of years of data that seems to be a much better data set and source for whatever you want to call larger language models in our own brain.
- [30:42]
Jason Calacanis
Speaking of history cause and effect, you were early in Airbnb, in ByteDance and a lot of these top consumer companies. Do you feel that consumer is deterministic, that there would have been winners in the space were not for perhaps these
- [30:57]
Hans Tung
really great founders recently launched a prosumer AI40 list the NASDAQ yesterday with the help of 30 other great VC firms and JP Morgan and Google Cloud and fic and deployed is that just think back three years ago the first pro prosumer user on ChatGPT or on Cloud. I mean OpenAI team was shocked how popular ChatGPT became overnight. And if you look at the prosumer who use that, they're the usually the first adopters of innovations and so forth. So whether you want to call them consumer or prosumer, that segment that's very willing to be the first to try something new, they are very, very interesting group to really study and spend time with and that's what makes this job so much fun. I've been doing this for 20 years and still wake up every single day just bewildered and amazed at what are the new things that we haven't seen, haven't learned. And be able to have the humility learned from prosumers who are the first user in many things is a privilege.
- [31:53]
Jason Calacanis
Well Hans, you're an absolute legend. Thanks so much for jumping on. Looking forward to doing this again.
- [31:58]
Hans Tung
Thank you for your great questions. Love your podcast.