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- [00:00]
Ryan Reynolds
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- [00:22]
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- [01:01]
Spencer Ferrar
Fit Foreign.
- [01:11]
Jen
We are talking all about the markets with Theory Ventures partner Spencer Ferrar. Spencer, welcome to the show.
- [01:18]
Spencer Ferrar
Hey Jen, thanks so much for having me.
- [01:20]
Jen
Of course, thanks for being here. Now, we were talking about AI and crypto from a policy angle just now, but we can't ignore the markets. They have really been volatile for a number of different reasons. But let's just focus in on AI right now when it comes to AI related cryptocurrencies or AI equities. What are you watching?
- [01:43]
Spencer Ferrar
Yeah, look, I mean, it's been a while past couple of days. Obviously we focus on private markets primarily and so really we're meeting with entrepreneurs who are innovating kind of at the intersection of AI. Our firm focuses a lot on both traditional AI and AI within crypto, things that are exciting to us. Look, I mean, I think every business over the next 10 to 15 years becomes a business powered by AI. And so specifically within crypto and AI, we're seeing a lot of innovation more recently coming out of some of the foundation labs on some research. DLOCO is a paper that came out of Google recently. And so we're starting to see people who are training models in a decentralized manner. And so there's been some great innovation there. I think historically what we've seen over the last year or two has been mostly kind of chat bots, trading bots. So a lot of tooling infrastructure on that side. But we're Starting to see people with great pedigrees come into the market. And we actually just backed a company with someone who has a master's in nlp. They come from a high frequency trading background. And so I think in terms of the talent that's starting to come into the crypto space, we're seeing a pretty significant increase there on the equity side. I mean, when we look at the equities market, I think there's been a lot of concentration into a handful of names. And a lot of that is in part because companies are staying private longer. And when companies stay private longer, there's not a lot of access for AI exposure within public markets. And so you saw very lofty valuations within a handful of names. But for us, again, kind of we're really just focused on entrepreneurs who are at the formation stage of their business. And so we're a bit disconnected from the public markets. And I think it can be a sigh of relief, especially in times of volatility like we're seeing over the last few days.
- [03:34]
Jen
I know you just said that you're a bit disconnected from the public markets, but I got to ask you, just a follow up, based on what you just said, are you thinking that maybe people are a little over indexed in these AI related equities looking for exposure to this thing that's become really exciting and taken over the headlines recently?
- [03:52]
Spencer Ferrar
Totally. I think if you look at the Mag 7, it was responsible for most of the returns over the last year. And I think crypto potentially offers an interesting opportunity for investors, which is a lot of folks want exposure to AI, but given that these companies are staying private for so long, it's difficult to find that. And so tokens offer an interesting investment vehicle which is you're able to get access to projects much earlier in their valuation life cycle. And so really we do think that like people are constrained. Right. If you want AI exposure, there's only a handful of names. Microsoft, Google, Facebook. Right. These are all big, big companies. And so some, I think, retail investors may have interest in investing in tokens specifically related to crypto and AI.
- [04:38]
Jen
What are the most exciting AI developments for you lately as an investor? And I ask you this because, you know, you mentioned for so long chatbots were a thing, right? Everyone was incorporating chatbots into their business model. Now we're talking all about AI agents, which maybe is an iteration, an iteration or two of chatbots. But what's the most exciting AI application for you? If you think towards the future and you think to how businesses might be Implementing the technology a ways out.
- [05:06]
Spencer Ferrar
Yeah. Look, my framework for this is kind of similar to how trading in the equities market evolved over time, right? So in the equities markets you had most trades occurring in a manual, in a manual way. And then a lot of that order flow has now moved to automated trading. And so I think similarly what we're going to see really is that most businesses move from, you know, manual workflows to automated workflows. And a lot of that will be in part because of agents and mean just to kind of touch on like some of the areas that we focus on. We're typically looking for kind of three things within a market when we get excited. The first is that there's turmoil in that market, right? It's, it's difficult to staff, it can be a tedious job. Maybe it's a repetitive task that people don't want to do. The second is that there's a large labor budget. And so we really do think that agents and AI will be able to capture some of that budget over time. And so then you can build really big businesses. And the third is really the potential to kind of reinvent these workflows. And so those are the three things that we're kind of very focused on here. At Theory. We're a thesis driven firm. We spend a lot of time researching these different areas. I think to your point around like what's seeing traction and what we're interested in. Those things are sort of separate depending on your timeline and where you're investing. Obviously we're investing for a long period of time Today I think you're seeing a ton of innovation. There's a bunch of companies that are growing from 0 to 10 million in ARR very, very quickly. A lot of them are around coding, automation. I think the thing that's to be seen there really is switching costs. I think switching costs are relatively low. AI has really changed the way businesses operate. People are able to operate engineering teams much more leanly. They don't have to hire as many employees. But to get to your question, I think really where we're interested is a company that's building at the intersection of those three things that I highlighted earlier. Within crypto and AI, I think you're starting to see people who are building and incorporating AI into their products. So it could be trading infrastructure. We're seeing a bunch of security companies that are using AI. Stablecoin workflows are being automated using AI. And again, so I just really think the underlying theme is that every business will have an AI component. And so there's quite a few intersections we're excited about. We're really kind of core. We have a core focus on three or four. But again, I think every business will have an AI component.
- [07:38]
Jen
If you had to pick one company to watch, what would it be? And it's okay. If it's one you've invested in, we can disclose what. What's one that you're really excited about right now?
- [07:49]
Spencer Ferrar
Oh, man, that's a really tough question. I actually think, like, one. One concern, again, to the point I have is, like, if switching costs are so low, the cost of software development collapses over time. And so I think if you are building a company, I think there has to be, like, inroads to competitive emotes or, like, high returns on invested capital. I use some of the coding tools every single day. I think that has the greatest product market fit today. But I do genuinely believe that we'll see agents that are executing trades on behalf of users. We'll see agents that are automating a ton of workflow within specific verticals. Both kind of sexy and unsexy. But I think if I were to make a bet, it is that, like, we will have agents that are completing tasks on behalf of users. And so there's, like, a number of different verticals that are extremely exciting. The ones that I've been spending the most time in are data related. Right. Because we really do believe that data is kind of the core underpinning for all of these companies. And as these businesses start to build competitive moats, really, it's going to be the IP that they own that allows them to build more proficient agents and models over time.
- [09:04]
Jen
All right, Spencer, thanks so much for joining the show.