Andy Cross (3:37)

That's incredible. What is the statistic about how many millionaires and billionaires are inside the Nvidia company today? Or the estimates of that?

Stephen Witt (3:45)

It's funny you mentioned it. Let me. I'll give a long answer. In 2005, you recommended the stock. It looked terrible for the first, probably six or seven years, you recommended it. In 2008, their stock went down 80%. And people inside the company were growing, growing upset because they purchased stock via the esop, and they were like, I'm really underwater here. Like, what do we do? So Jensen implemented this policy that not only could you buy Nvidia stock if you're an employee at a discount, but you could actually buy it at a discount to any point. The stock had traded it in the last two years. Okay. So as Nvidia stock started to go like this, they kept that policy in place. So every employee in the place did this free money trade where they maxed out their cap to the ESOP and basically put all of their incremental earnings into, like, basically free money Nvidia stock. And then the rest of them just held it. So now 50% of the company, there's only like 30, 40,000 people at the company. 50% of them have a net worth exceeding $25 million. That's incredible.

Andy Cross (4:44)

I mean, and if you look at, like, the.

Stephen Witt (4:45)

The top layer of management, I mean, they're all at least sent to millionaires, if not billionaires. I was talking to. Yeah, I was talking to Tench Cox, who's been on the board and actually was one of the first investors in 1993 before they went public. And. And Tench is invested in thousands of companies, both as a venture capitalist and as a kind of classic stock market investor. And I was like, is this your best investment? And he looked at me like it was the dumbest question anyone had ever asked him. He was like, yeah, it's my best investment. And later I realized that if you have a founder's stake in the most valuable company in history, then by definition, that is the single best investment you could ever make in human history. And tension made it now.

Andy Cross (5:25)

It's just incredible. You talked a lot about the. You just mentioned about the R and D efforts behind Nvidia. And a lot of people and analysts think that Nvidia is really good at catching the wave. But your take is different. And I want to unwrap this a little because they really are creating the waves. They're like the tsunami, the earthquake.

Stephen Witt (5:44)

They make the wave.

Andy Cross (5:45)

Yeah.

Stephen Witt (5:45)

Jensen calls this the $0 billion market. And what it is, it's building products that not only don't have any competitors, but. But actually have no customers. Yeah, dead serious. No, that's the zero in $0 billion market. There is no customers. When Jensen started building dedicated hardware for artificial intelligence, that market segment did not exist. Now, this will be a little crazy to think about now. Fifteen years ago, AI was a career graveyard. The total amount of venture capital investment in AI in, like, 2010 was closer to zero than any other meaningful number. And not only that, but it had repeatedly disappointed investors in the past. And so it was just music. Not just a dead field, but like a radioactive field. You just didn't go there with money. And every AI scientist I worked with at that time was like, yeah, I just kind of figured I would do what all AI people did, which was like, deliberately earn less money for the rest of my life so that I could work on the thing I was actually interested in. And I'd be a research academic. The guys who really invented the modern neural net had so little money that they actually had to pool their housing stipend together to buy two Nvidia gaming boards to. To train the first neural network. And that's real. The first really kind of like modern neural network. So that's where this stuff comes from. Jensen was serving this market segment that was so small that it was essentially invisible. Right. He's making these gaming cards, okay? The original use is to speed up your frame rate in Quake or in Halo. And the reason you do that is that if you're shooting at the guy, you want a few more frames per second so you can get a better bead on him. That's the technology that powers all of society now. Dead serious. That's why they did it. But this cutting edge use case had a lot of other applications and one of them was kind of scientific computing, or what we call supercomputing. Now, Jensen basically shipped all these cards with a second program on it where you'd flip the switch and turn your gaming board into a low budget supercomputer. So who is that for? Well, it's not for an established research scientist, right? Those guys can afford time at a conventional supercomputer. It's for a scientist whose research is out of favor for marginalized scientists, right? With no funding. It's for a mad scientist, right? And that's what these guys were. That's what these AI guys were. They were mad scientists working off in the woods on weird projects that no one ever thought would succeed. And Gensa gave them the tools to not just kind of create the thing they wanted to create, but actually to create an entire ecosystem and industry around it. So this is how the $0 billion market works. You go to a place where not only is there no competition, there's almost no customers at all. And then you hope that the fuel grows around what you've built, then you've locked them into your system because you were the only one providing it at the original thing, and you build a whole ecosystem around it. Gensa is doing this today. I'm writing about a humanoid robotics right now for the New Yorker. This is this coming wave of home humanoid robots. They, they look and they move and they act like humans. They're going to be shipped into industry, into service jobs, and maybe even eventually into your home. Well, to do this, you need a powerful AI inference chip. Okay? This is the chip that is basically the robot's. Literally it's its brain, right? It's a robot brain. So who was building robotic inference chips in 2017 when there was no robotics industry trying to buy this stuff? It was Gensit and it was Nvidia. I've talked to maybe 40 robotics manufacturers in the past three or four months. Every single one, without exception, runs on an Nvidia Thor. Jensen chip in its brain is a monopoly on the robotics inference market, which did not exist until he invented it. Okay, so this is How Jensen thinks and this is how he works. And you know there's a cost to this, right? Like he's losing money for years building these products that nobody is buying. Right. And actually in the old days, in the 2005 days, it almost got him kicked out of his job.

Andy Cross (9:40)

Yeah.

Stephen Witt (9:41)

Like they did. The investors didn't like it. They were like, what are you doing? You should be returning this money to shareholders via share repurchases or paying a dividend. Why are you chasing this pie in the sky market that doesn't exist? But you know he had the last laugh.

Andy Cross (9:53)

Yes, a lot of laughs.

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Andy Cross (11:06)

How does Jensen marshal? You mentioned about the just the challenge of talking to investors when they're making these investments. But just in a company like Nvidia, how does he marshal the commitment to be able to be that forward thinking in the way that he is attacking these big problems?

Stephen Witt (11:23)

From Jensen's point of view, it's actually riskier not to do it. I remember asking him, why did you ship this expensive supercomputing software with every card, including the ones you're selling at Best Buy? Why are you doing that? And he's like, well, it was risky. To do that. But there was also a risk in not doing that a long time. I didn't understand what he meant. But Jensen is a disciple of Clayton Christensen, who wrote a book, as I'm sure you're familiar with, called the Innovator's Dilemma. And this is the book that brought the buzzword disruption into kind of modern parlance. The term disruption has grown meaningless through overuse. But if you go back and read the original version, what Clayton is talking about is not necessarily high tech technology. In fact, pneumatic shovel was one of his first disruptive technologies. And the canonical example he uses was the Honda motorbike. So when Honda entered the US market in the 60s, there was no room for another car. So they marketed a dirt bike to teenagers, basically. Actually, the Beach Boys wrote a song about it. And you know, this was a low margin, small, $0 billion market, basically. But what Honda realized is that if they could kind of sell this market here, GM wouldn't come and compete with them. It would lower GM's margins to build a dirt bike. They're selling Cadillacs or high margin product. If they go and open this small dirt bike business, then investors will yell at them because their profit margins just went down. They don't. It's hard to move from a high profit margin business into a lower one. But if you don't do it, then you're very vulnerable to disruption, to competition coming up from below. And that's exactly what happened at GM, which by the way, in the 1970s was they were the Nvidia of their time. They were the most valuable firm in the United States. But Honda came and rated their whole market from below as they iterated upwards from the dirt bike to a compact car to a minivan. And eventually GM has nowhere to go. Honda and Toyota have stolen all their market share, right? So with Jensen, he's like, and this is the secret of the innovator's dilemma. It's not actually a manual for how startups can succeed. It's a counterinsurgency manual for how established firms that are like, aging out of their market can defend their territory against these startups. And by the mid-2000s, Jensen, who had dominated the gaming market, was now terrified of all these Asian startup companies that were going and building cheaper tools. And he said, I have to invest counterintuitively in a low margin business with very few customers. It's exactly what Clayton Christensen advises in his book. And actually Jensen hired Clayton as a consultant. I have to go invest in a market that is small, that does not return immediate capital because then my competitors won't follow me there. That's the only way to save this business. So for Jensen, the risk of inaction, the risk of not doing this is actually higher than the risk of just continuing to, you know, as he understands it, especially in tech, especially in tech and especially in semiconductors, you cannot sit still, right? Only the paranoid survive, as Andy Grove said. So I have to build a business that's adjacent to. Oh, and by the way, my business, we don't manufacture anything here. It's all done in Taiwan. This is just an R and D laboratory. So if I'm not constantly designing innovative new products, I have no purpose to exist and I'll be competed out of existence.

Andy Cross (14:38)

And you've written that he's basically thinks like, hey, we're 30 days, right? Going out of business at any given time.

Stephen Witt (14:43)

That's right. In fact, it was literally true several times at the beginning. It was tough sledding for Jensen. If you look at the first 15 years, even as a publicly traded company, it looks like an electrocardiogram of somebody having a heart attack. The Stock went down 90% twice. Like, it was tough, tough, tough, tough. Like. And he almost lost his job. There were activist investors involved. And during this period, he was just trying to get this company to find a market beyond video games. And I should say, you know, there were a lot of things that failed. There were a lot of $0 billion markets that to this day remain $0 billion markets. The customers never showed up for what they were building. But to Jensen, that's okay, right? As long as one succeeds and you become the most valuable firm in human history, it doesn't matter if the other ones fail, right? So in addition to robotics, there's 30 initiatives. Now, I think a lot of them will not succeed, and he would probably tell you that, but he sees the logic at least, or the potential for customers to arrive in each one.

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Andy Cross (16:11)

you earned and you were given kind of unparalleled access to Nvidia, Jensen, his team. What was the thing that impressed you the most and what was the thing that maybe surprised you or maybe even unnerved you about learning about Jensen.

Stephen Witt (16:25)

The best thing about Jensen is just his candor. Like he, okay, I interviewed Jeff Bezos once. This was in like 2016. And Jeff is surrounded by an army of PR people and lawyers. And I have a, a list of pre approved questions that I'm allowed to ask. And I tried to ask him about this was in 2016. I tried to ask him about Donald Trump's presidential candidacy and the lawyer basically tackled me and dragged me out of the room. You don't go off script with Jeff. With Jensen, there is no script. You can ask him anything. Is this guy's worth like $100 billion? He talks to you as if you just sat down at a coffee shop with him. It's amazing. That's extremely rare. It doesn't happen with CEOs in my experience and I've tried to interview or have interviewed many of them. So his candor is extraordinary. And it really helps him in business too, because he is the fastest to admit. If something's not working, what needs to change. There was no illusions, right? And there's no sunk cost fallacy with Jensen. He's a really great critical thinker because he's so honest and rigorous with himself. Now, the flip side of this, it's like a Greek tragic flaw. The same thing that makes him great kind of makes it difficult for him. He's totally neurotic. I can confirm your Suspicions that most CEOs are basically egomaniacs, but Jensen is not. Truly. He truly is not. In fact, he's like riddled with guilt and self doubt. And this drives him, it fuels him. This is what makes it work for him. Because he's constantly assessing both Nvidia's competitive position and his own role and asking what's the thing that could make this company collapse? Weirdly, almost everything Jensen does comes from a negative emotion that he has, typically fear or guilt. And almost every action Jensen takes is actually, or at least can be construed as a defensive action to save his company from ruin. It's a really unusual way of thinking. And I think actually his internal life is kind of hard. Probably most people in this room have an easier kind of internal mental monologue than Jensen has for himself. I mean, in some sense, he truly is almost uncomfortable in his own skin. He almost like hates himself. He's beating himself up constantly. I find this in some ways relatable. I remember I was talking to Jimmy Iovine once. This is on a separate story. I wrote about music. Jimmy Iovine is a music producer. He worked with Dr. Dream, but early in his career he'd worked with Bruce Springsteen. He's like, yeah, I'll never forget when Bruce Springsteen came into the studio. And he was like, God, I'm washed up. All of these younger artists are doing better work than me and it's all over for me. It's all over for me. And then he writes Born in the USA and it comes from a place of feeling like he's washed up after 10 years in the music business. Right? It comes from fear. And Jimmy Iovine was he can't believe how powerful motivator fear can be for an artist. I guess it's true for a CEO too.

Matt Grier (19:12)

As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for the Motley Fool Hen Gems investing team, I'm Matt Grier. Thanks for listening and we will see you tomorrow.