Invest Like the Best with Patrick O'Shaughnessy
00:13:58 · Ramtin Naimi
[00:13:58] S1: I know one fund that raised $2,500,000,000 and started deploying in July and told me they're gonna be back in market in January. I know of another fund where my LPs told me they gave them $3,000,000,000 nine months ago, and now they're back looking for $5,000,000,000. And they'll get it. These guys are all great managers, and they'll get the numbers they're looking for, but that's the intensity of the pace. The other thing that's really interesting about this market is not only these guys need more money quicker than they thought they needed it, but now it's actually starting to have ripple effects to the companies that are getting their term sheets in terms of when they actually get the capital that they were committed to. So I'm seeing companies in the last eight to twelve weeks, and this is the first time I started to see this in the cycle where the VCs are giving them term sheets and saying, hey. We wanna put a $150,000,000 in your company. Is it okay if we fund it in, like, mid January, which is three months from now? And founders like, wait a second. You need three months to fund? And they're like, no. No. We're good for it, and they are. All the money in our current fund is already committed to existing companies, and we're in the middle of closing a new fund. But by the time we get all those docs in and onboarded and we got our capital facility set up, it's gonna be like mid January before we fund. We had another company that got a $50,000,000 term sheet from one VC firm, the VC was gonna do 40 out of the 50. And they said we could wire 5,000,000 upon closing, and we need another eight to ten weeks to fund the remainder of our commitment. So that's kind of interesting in terms of, like, these guys are committing deals before they even have the money to finance. And they'll get the money, but it just draws attention to the pace that these things are really getting deployed.
00:15:20 · Patrick O'Shaughnessy, Ramtin Naimi
[00:15:20] S0: To step all the way back, this seems furious and unsustainable and maybe understandable given that it's funding the most interesting technology build out any of us will ever see or in human history or whatever. But the Anthropic S1 came out, which makes it an interesting day to be having this discussion. The most glaring stat in that thing is that they've raised $140,000,000,000 and they've spent 10 of that. And they have 132,000,000,000 on the balance sheet. That's pretty amazing that they burned $10,000,000,000 of cash. Forget about all the future commitments and the liabilities and all these things for just a moment. But $10,000,000,000 of cash to get to the revenue numbers that they're at with 85% gross margins is unbelievable. Does all this make you wonder if we need some innovation in financial products? It seems like when you boil down why everyone needs all this stuff, the answer is always just compute. It just makes me wonder, are we trying to solve a very modern problem with what's become an antiquated instrument or style given this psychotic behavior? [00:16:21] S1: Yes and no. There are no shortage of new debt vehicles to finance growth in companies. I think GC has like their Yeah. The customer value. Customer value fund. Exactly. It's like if you could prove that for every $10,000,000 that unlocks $30,000,000 of revenue, we'll give you the money to finance that. [00:16:38] S0: I guess that sort of makes my point though. Like, that thing's been from a product perspective [00:16:42] S1: Yeah.
00:16:42 · Ramtin Naimi, Patrick O'Shaughnessy
[00:16:42] S1: Yeah. [00:16:43] S0: Enormously successful. Like they've raised tons of money. Yeah. If you just think as a product, like it's done really well. What I'm wondering is do we need like way more things like that for each type of spending that's happening in these companies? Lots of which is panic buying or reserving of compute ahead of anticipated demand. Some of these personal agent companies are thinking about how much money they're gonna need to spend to grow to the daily active user accounts they need.
00:17:07 · Ramtin Naimi
[00:17:07] S1: I think there are vehicles that are emerging. There are some VC firms that are financing companies with compute as opposed to cash. And for a lot of the founders we talked to, that's actually more attractive. They're like, hey. If you bring this compute instead of cash, you guaranteed your allocation is wrong because we're gonna take this money and spend it on compute regardless. So think there are some people doing that, but then you have to go secure the compute, and you have to make sure you're getting good pricing on the compute. And then it's a little complicated in terms of do you give them the compute in perpetuity? Do you give them the compute for one training run? How many times can you recycle that same amount of compute to actually make up for the amount of capital you have deployed? Like, can you recycle the amount of compute you have three times, two times, one time? How much of these things actually get degraded over time? I think there's a lot of complexities in that. I haven't seen much else. Getting new capital structures to get widely adopted in Silicon Valley is complex and challenging because VCs by default like their companies having clean equity that don't have unique covenants that can put the company in a tricky spot if they don't think about them. I think by default, most founders are like, we just want a clean equity deal where we know we gave away what we got in return. GC's value creation fund is doing great now, but I think in the early couple years of it, it was a very significant, like, education process, why this is a good product, why it should ride for you. Because founders usually, for anything capital related, rely back on their VCs for opinions on whether this is a good capital source, and VCs historically don't like venture debt products. So they give you a million reasons why you shouldn't do it. And then I think the other side needs to give you the million reasons why you should do it because it does make sense because it is a new product created for this day and age of venture capital. I think there's always room for innovation on capital structures to fund a new paradigm of companies that billions of dollars in equity capital to spend all on compute might not be the best use of equity capital.
00:18:51 · Patrick O'Shaughnessy
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00:20:49 · Ramtin Naimi
[00:20:49] S1: The thing that we're seeing in our portfolio companies is that we are routinely helping them find compute because finding compute for them is not easy. A lot of the largest neoclass, and we have relationships with a number of them, aren't really interested in engaging with compute deals that are, like, sub $200,000,000 in scale. And so companies that don't have that level of scale are, you know, trying to lease some capacity here, some capacity there. But those guys, on a relative basis, don't actually make up for the scale of this market. The people that are actually moving the needle for how much compute is necessary in this ecosystem are the hyperscalers, the frontier model labs, and then, you know, the companies that are private. NeoLabs raising $1,000,000,000 plus seat valuations effectively. I think the only thing that limits demand for compute over time is if their compute needs from these companies diminish or the companies that have these compute needs have a harder time raising capital. There's a subset of companies that you know, I know that are gonna continue raising because they're the best assets, and they'll have all the cash they need to buy all the compute they need. I think the most interesting segment of the market, which on a relative basis is still small for the hyperscalers, but if you can aggregate all of them together, I don't think the scale is that small. It's sort of the Neolab segment where people started looking at NeoLab, saying there was gonna be, like, two or three great ones, and now there's probably 80 or 90 NeoLab that have raised somewhere between one to five billion dollars. And the funniest thing with them is, like, they all need to raise tons of cash. We met in NeoLab a couple weeks ago that was raising a $1,000,000,000. I think this was their second round of financing. And they were gonna spend the entire billion next year on compute for one training run, and they said they would probably need to raise another 5,000,000,000 throughout next year. The tricky thing with these companies is it's very hard to underwrite how well they're doing. The funny thing with Neolabs is you kind of underwrite how well they're doing this and how much money they're raising. But oftentimes, they're launching things that are very impressive.