Transcript

[Harry] Sarah, I am so excited for this. We just looked before one. It was the 25th of January, 2017, when we did the first show. So thank you so much for joining me, Sarah, after an incredible six years.

[Sarah]Yeah, thanks for having me, Harry. You were 20, which is amazing, and the episode was why conversational will be the next big thing, which is, I think, like a shade early.

[Harry] It's slightly a shade early. The importance of market timing has never been more prescient. But the most exciting thing is you've started a new fund recently with conviction. And so I want to start on this. I obviously spoke to many friends and mutual friends before, and many of them said that I had to start on this. So why did you decide to leave Greylock first?

[Sarah] Yeah, Greylock is like this, I mean, we have many mutual friends there, some of my dearest. It's a seven-year-old platform with extraordinary history and people. I played for the team for 10 years. Amazing place, super grateful for the opportunity, like lots of mentors there. I love the people. I really wanted to focus on early stage investing. Zero to one is just magic, and I wanted to be an entrepreneur. Again, you can't rationalize that, right? It's a great job being a GP at a big VC firm. It's crazy to leave. But I wanted to operate differently. I had a few ideas for how a small team could do venture, how you could change the founder experience. And the biggest thing was believing that AI is a breaking change.

[Harry] It is a great fucking job being a GP. This is what I've learned by starting a fund. You don't have to do any of the shit behind the scenes. Like being a fund manager and being like a GP are very different things. Has there been anything surprising for you, making the switch from GP at the hailed fund to being fund manager and founder?

[Sarah] Yeah, like I have a lot more existential dread than I used to, so that's one thing. But as you said, like also a fund is a business like any other, right? Like I run rippling payroll now. Like we have an office, like the sort of administration, and we have two sets of customers, entrepreneurs and LPs. So you think about strategy for your business, you do recruiting. We were just talking about that. I did recruiting at Greylock too, but it's not a job, right?

[Harry] Yeah, I always used to look at GPs at big funds and was like, oh, why didn't you start your own? And now I have my own. I'm like, I get it. I get it. They told me that running a media company and the fund at the same time would be a good idea. They lied.

[Sarah] But no one told you that, Harry. You're the only person who's... Yes, that's fine. I have 40,000 hours in the week.

[Harry] Yeah, no, you're right, actually. That was me. Okay, so we mentioned conviction there. We mentioned kind of the AI focus. What's the thesis with conviction? And why did you decide to back the farm on this single thesis?

[Sarah] So AI is the biggest value creation opportunity in our lifetimes. Like I'm quite confident that we're going to have 10 and 20 person teams building billion dollar businesses. And if we at conviction can be central in this community, and it's not like a blip on the radar, it's decades of change. We deeply understand it and become best in the world at identifying great companies and partnering with the founders, building those companies. Like, I think it's an important opportunity.

[Harry] I think that's a very compelling stance. You said how the style changed. It's changed because I used to stick to schedule. Now I don't. I'm really worried about wealth inequality. And when we think about teams of 10 and 20 building these billion dollar companies, I agree with you totally. I'm just worried that we're going to see this centralization of wealth with the evolution of AI and becoming more and more prominent in technology and society. Do you agree? And am I right to be worried?

[Sarah] I do agree with you. Maybe people don't want to say that out loud, but I would agree with you and then also say technology, it drives abundance. If that's anything from agricultural revolution, industrial revolution, computing, I think we will produce more. And the question is, do we want more if it is going to begin by being distributed very unequally? My answer is yes. Like you give people these technologies and rarely do they say take it away. I'm going to stop using it. I think the productivity benefit is incredible. That's possible. And that doesn't mean like we as a society and on the policy side and in a very democratic way need to address that distribution. But I think it doesn't mean to me don't make progress.

[Harry] The thing that worries me though is like regulatory bodies. Again, we've never seen such a big chasm between regulatory body knowledge and like the actual technology itself. This worries me that they're not in a position to actually regulate with the main knowledge. Do you share my concern?

[Sarah] I think it is a concern. I don't think it is structurally different than other areas of technology, right? So if you have the internet, you have cybersecurity issues. And so I've been a longtime cybersecurity investor. I've engaged with national security bodies on policymaking in this area. And I'm spending time in DC two weeks from now on thinking about AI risk as well. So I think the thing that is different today may be the speed of change. Like I don't think we have decades to adjust to these capabilities in society. And so I think it's incumbent on anybody producing the technology, enabling the technology to go partner with policymakers and the rest of society and do that education, as you said. And we got to build a new muscle here. I think it's important.

[Harry] In terms of the kind of the fun thesis, I think back to like when we had the iPhone come out, or when Kleiner did the Climate Change Fund, I think it was, or the Green Energy Fund, or whatever that fund was.

[Sarah] Oh my gosh, yeah.

[Harry] But my point is, I view this as like an enabling technology, which everything will be built on top of. I had Navan founder Ariel on. And like TripAction is what Navan is now using. Everyone is like sitting on top of it. Why have a vertically-centric AI fund?

[Sarah] You're asking me to like give away the kind of hidden secret of the fund, right? So here it is, though. If we at Conviction are right in the long term, and this is the most important technology change of the decade, and we're good at selection and execution, and we invest in this outsized number of important tech companies, again, it just means that they will be the most important companies, period. And so yes, you're right. Like I think it's eventually just a horizontal software fund. But right now, I think it's also useful for us to be specialists. Like the AI community is actually quite limited in size. And so if we are focused on that, we can invest in the community, because applied research matters in a way that has never before. I think your average venture capitalist does not spend a lot of time in computer science research. And then you do a lot of community building. Like we can be a matchmaker for teams, a sorting hat for people who want to get into AI startups. There are strategic relationships that are very specific to AI, right? People need model access data, GPUs, design partners. And then I think there's like a new set of understanding and tribal knowledge, because it's a very technical and dynamic field. Like we're rethinking a lot of user experience in a way that hasn't been true in two decades. And I think founders in this field in particular, they want, I think they should want investors who know something about these strategic issues for them. And we're talking about like safety and alignment even. And I think like in the near term, it's more specialized.

[Harry] Do you think most VCs actually get it or is it BS?

[Sarah] So I think there's a lot of genuine and justified enthusiasm as well as a lot of like FOMO and pretension. But broadly, no, there's not a lot of deep understanding yet. This is a technical and dynamic field and the research is intersecting with the real world at a pace like I've never before encountered in more than a decade of investing. And then you could ask the question, like, is that a good idea? If you're choosing people and founder quality, maybe you could still do really well even against this type of investment. Buying access to investments without some level of understanding sounds perilous.

[Harry] We've seen so many of these investors and so much of the VC cross go absolutely freaking nuts for obviously AI.

[Sarah] We never learn.

[Harry] No, we never learn. Boom time is not over, baby. My question to you is, actually knowing the space, what do you make of the current craziness within AI funding circles?

[Sarah] Yeah, so I think the craziness in a small number of instances gets like very amplified by the media. Yes, there is enthusiasm and less sensitivity to pricing in a certain style of AI company than others in this macro. But like maybe five companies have come out of the gate raising a huge amount of money. That's not what most founders understand, but it's those five companies that the story gets repeatedly told.

[Harry] But like Character.AI, is that crazy or is that justified?

[Sarah] So I just had Noam Shazir on like my podcast with Elad and it's called No Priors and Noam is brilliant and the engagement data on character is really special. Pricing is determined by market participants. The broader response would be, I think that a vanishingly small number of AI companies can spend a hundred million dollars upfront well and constraint is the name of the game in startups, right? It like breeds discipline and creativity. The other side of it is there are AI companies with like really extraordinary traction right now and so I think we should recognize that.

[Harry] I've met quite a few founders who say, Bluntly, to build what we want to build, we need to raise much larger sums than traditionally were raised at pre-seed or seed rounds. So we're raising 50 or 75 or even a hundred. Is that true that AI companies are much more capital intensive in the early days? If so, what is the spending on? Can you help me understand that Sarah, genuinely?

[Sarah] Yeah, so we're meeting some of the same people that have this point of view, right? So the thing that is really expensive, I mean there are many things that can be expensive, but one of the things that is really expensive is I want to train a model from scratch that is very large and it's going to take me low tens of people, probably 20 or 30 people, that know how to do this type of research and 10,000 plus GPUs and X number of months. That is very expensive. My personal point of view is there's less than 10 instances I can think of where that is going to make sense for companies and the vast majority of companies are going to figure out actually how to apply these models that other people have built that are offered by APIs or in the open source or fine tune them or build some other part of the stack. And so I've honestly seen a lot of smart founders begin with this premise, especially people who come from a research background and then think through it and adjust course dramatically on how to sequence into understanding whether or not they even need that because I think a much bigger question than can you train a large model is does anybody want it? Is it going to be useful? And you could answer some of those questions upfront.

[Harry] Can I ask, is your fund size big enough? If you have a $200 million fund and you're doing like seed in AI and for diversification levels, you want 30 at seed, that's $5 million checks done with fees you're done and that's $5 million check and you don't have 200.

[Sarah] Yeah, no, it's $100 million fund. Okay, so I have lots of very smart investor friends ask this question all the time and without arrogance, like I could have raised half a billion dollars and if I believe constraints breed discipline and creativity for founders, they also do for investors. And so $100 million fund size is very focusing. We do early stage, we don't do growth. We are not going to do things that structurally don't make sense for the fund and we're working with really extraordinary people and the first handful investments in the fund and they're seed investments. They're seed and series A investments and we're putting a million to eight or $10 million to work. We're going to be more concentrated than most seed funds but I just think the bulk of the opportunity is in companies that can be much more capital efficient. But I think the pressure to raise bigger funds and collect larger fees and do more things is real. It's just like, does it matter, right? Will that generate returns? I don't think so.

[[Harry] You said they're structurally not right for the fund. What is structurally not right for the fund in your eyes?

[Sarah] I think it is unlikely that if somebody wants to raise 100 or $200 million at a billion dollars out of the gate, it's hard for me to imagine that making an impact on the fund.

[Harry] So I do brand checks. It's actually impactful and important that you're in the biggest and the best names, especially as you establish the conviction brand. Do you not feel it would be worth it to put in the 100K check into that round so you could bluntly get the brand, which does resonate with community?

[Sarah] Yeah, I think we make investments in companies that we want to be a part of the journey for but it's a very small set of companies. And I think the real thing that drives brand in the long term is A, returns, B, companies that matter, and C, reputation with founders. And I think we can do that generally by just playing our game and being good at this. I'm willing to take that risk.

[Harry] We've spoken about concerns within the fundraising market. In terms of opportunities, I'd love to show you did with Elad on No Priors. And you said that one of the most exciting opportunities is in tooling where the error rate doesn't lead to catastrophic effects. Whatever that is, work for automation, whatever we want to choose. Where are the most obvious nascent, low-hanging fruit, do you think, in terms of use cases that you're like, yes, perfect, this is great?

[Sarah] Yeah, so one of my favorite investments so far has been a company called harvey.ai. And the legal profession is a text-in, text-out profession. We can do a lot of the work that a first-year legal associate does end to end with these large models. And that's very valuable. But there are so many opportunities that are very attractive. Code generation is obviously powerful. Copilot is not the end of it. We're just beginning to exploit that and democratize it. Copilot is just local context autocomplete, which is incredible on its own, right? RPA, big category of software, is going to be obviously reborn. We are actively interested in finding founders to back in tooling for LLMs, retrieval, feedback. It's a very crowded space now, but we're excited about multimodal models for creative and marketing use cases. This is really expensive today, and people are going to get much better content. I'm sure you guys will start to use this stuff soon if you don't already.

[Harry] Do these co-founders, when they come from, say, accounting, when they come from legal, are they steeped AI technologists, or are they former lawyers? Are they former accountants who are steeped in the domain knowledge? What was more important, the technical deep knowledge there, or the domain knowledge of knowing accounting back to front, legal's back to front? How do you think about that?

[Sarah] Ideally, you have some combination of customer-backed domain knowledge and understanding of product and research. And so that is something that I think we can try to do, like help people pair up. We spend a lot of time with the research community, but I think the vast majority of companies, like software, is going to end up being built by run-of-the-mill product-oriented engineers, like special founders, but people who come from software engineering. And that's because this is going to become tooling like any other part of software, and the number of people who know how to leverage these models is growing, which is great for you and me. We're going to see more interesting companies from people who are really customer-oriented.

[Harry] I think there was a stat, like currently 41% of co-creation is done by artificial intelligence of some sort. Where do you think that will be in five years, Sarah?

[Sarah] I think we'll look at a different metric. So that's the auto-complete stat of, I know what's happening next. I'm typing, and GitHub Copilot helps me finish the sentence, the function. I think you're going to get, human does planning. I, Harry, want a system that does x, and then it's going to be more iterative. I want a website, for 20 VC, with this set of features. No, change it this way. I think we're going to get much more end-to-end stuff soon. And so I think we're going to have AI systems that can do these things, and you'll just communicate your preferences, maybe more naturally to a more generalist model than your average engineer today. But that doesn't mean I think engineering as a profession goes away. I think they just leverage these tools much better.

[Harry] How do you think about the startup versus incumbent? I love Alex Rampell's quote, which is, the question is, will the incumbent acquire innovation before the startup acquires distribution? But it's a question of who's best placed, and what challenges do each face? How do you think about that when comparing startup versus incumbent?

[Sarah] Yeah, this is maybe a very discouraging answer, but I believe in intellectual honesty. Classically, the only real advantage startups have is speed. And speed actually might matter more than ever when the environment seems to be moving at warp speed. What's the quote? Some decades nothing happens, and some years a decade happens. I feel like that is happening right now. It's hard to make a large organization move at that speed. On the incumbent advantage side, much ado has been made about this idea of a data moat. But honestly, there's a lot of data out there, and entrepreneurs are incredibly creative about collecting it and increasingly about generating it. And I don't think it's, oh, the incumbents are going to win this one, or the startups are going to win this one.

[Harry] When we look at the incumbent set, Microsoft are often hailed as the one who's embraced it most tactically, strategically, and efficiently with their partnership with open AI and the investment there. Do you agree that they're the one who's navigated the transition best first?

[Sarah] How could you not? I think Satya and Kevin Scott have done an amazing job championing, like really believing in this set of technologies, taking a bunch of bets, open AI and otherwise, and using it as an opportunity to try to leverage themselves into other markets that really matter, like search. We'll see what happens, but I think you'd be hard pressed to say that Google or Amazon or Apple is leading the field here.

[Harry] Who do you think is in the worst place from their adoption stance?

[Sarah] I think that Amazon and Apple will have to make more investments over time in these technologies. They don't have labs doing cutting edge work when they have the skill to support them.

[Harry] You said a kind of speed of execution there. I totally agree with you in terms of the importance of it. The thing that I also think is grossly misunderstood is the importance of the pick. I see great founders work on just shit ideas, and I don't mean that disparagingly. How do you advise startup founders on choosing ideas when the world is moving, as you said, at warp speed faster than ever before?

[Sarah] I get a lot of people ask me, like, what ideas do you have? And I'm like, I'm happy to go on a tangent of all the things that we think are really good markets to go after. But if you generically cast about for ideas, you're going to get a generic idea. And so I believe in this idea of having high resolution customer conversations. And so if it's solving a problem for yourself, or just really going and looking for problems instead, or even open research questions that you think are attached to an interesting market, I'll give you an example. The world is built on 3D models, from everything from entertainment to the physical world around us. It is an open research question as to whether or not you can generate 3D models that are usable in these use cases. But it's like, oh, there's no market risk. It's highly valuable. It's just, can we do it? So I think there's a bunch of different ways you can look for problems that become less generic, where you could come out of it and be like, I understand something as a founder. I have a hunch that it's unlikely that every other person that wants to be an entrepreneur is going to have. And I think getting to that level of depth of understanding and confidence, more founders would be better served by, as you said, spending more time picking and feeling confidence in their depth of understanding before they start going down the path preemptively. But it's uncomfortable. It's very scary to be in this exploratory phase. The real trigger for forward progress is actual contact with customer, right? Not the like, oh, I have this high-level idea. Is that interesting? That's very different from having a conversation. Do you have this problem? How do you rank this problem? This is my proposal. Can we follow up next week? And they're going to be like, I have shit to do next week. This is actually not that important to me. I was just being nice to you, Harry. And you need that resolution of feedback to have confidence.

[Harry] My question to you is we all say it's all about the founder. It's all about the founder. Sarah, honestly, I have turned down companies before because there is an amazing founder. But it's in EdTech, which just hell or high water, the churn is a complete bitch. And Duolingo is the leader. But it's still not a hugely valuable company. Or whatever. You're selling to the NHS in the UK, which is a horrible market. For you, is it about founder? Or is it market? I'm asking the harder one here.

[Sarah] Yeah. I'm a founder first investor.

[Harry] And I think- Even if it's a really horrible market.

[Sarah] One of the great VC firms has this phrase, actually an individual obviously, but it's a great founder meets bad market, market wins. Right? And I think that's a very common point of view. The slight nuance I put on it is, is there anything they could navigate to? And do they understand something that I don't that makes the market better? Right? Because these things are not static. They have their structural problems, right? If distribution is really hard, and it's a slow moving industry, and it's got low margins, that customer is hard to sell to. But if you have this idea about how to unlock distribution, and it makes sense to me, and you recognize all these problems in the industry, and you're just a force of nature that's going to break through, maybe that will work anyway. And so I guess my view is, you don't just turn away from all problems because this space has traditionally been hard. But it should educate you as to, does the founder recognize that? And can they navigate out? Are they doing something to uniquely break through?

[Harry] Sarah, I think we learned most from our mistakes. What was your biggest investing mistake, and how did it impact your mindset, do you think?

[Sarah] One of the investments I regret not making, and the anti-portfolio is pretty significant here, but multiple investments I regret not making, benchling, rippling, FBA, these are investments you make because of the founder. Sajith and Parker are really special people. I think the recognition of collaboration in life sciences has not traditionally been an amazing SaaS market. It hasn't been much of a market at all. Can you get confidence on something that's changing in the market, and can a founder change the market? I believe this is possible now, right? With Parker, transparently, there are risks around somebody who built a company before, which ended controversially in terms of his path there. I think the world of Parker Conrad, I think he's an exceptional entrepreneur, and my orientation toward really pushing to take all sorts of risk if the founders are really special is much stronger than it was five years ago.

[Harry] I had Parker on, and he was not reserved in terms of the exit from Zenefit, so don't worry, that was a very graceful departure. I do have to ask you, but a lot of people, we spoke about founder versus market, Andy Radcliffe, I think it was, who said that great founder bad market. My question is, a lot of other investors oscillate on defensibility. How do you feel about startup defensibility, Sarah? Let me just dangle that one out.

[Sarah] Yeah, it doesn't exist. Quite literally, you're starting with nothing. I think investors are wrong to look for it. What you are investing in is trajectory, and the ability for founders to navigate a market and a thesis. You might believe that a team doesn't have a thesis on defensibility. You might believe that a team is incapable of coming up with a thesis on defensibility if somebody is very early. You might as an investor not have one yourself yet. You're like, oh, I just don't know how the market really turns out. I think how a market turns out is actually quite unknowable, and if you are looking for defensibility at the seed, there's no company yet. This is a mistake.

[Harry] I do want to ask, in terms of the next generation of venture, we've got two very bifurcated worlds, which is your multi-stage large firms, and then your boutique smaller firms. Often vertically focused. How do you think about the next 10 years of venture? Is one a cool winner? Does it stay as bifurcated as this? Does one move into another? How do you think about those kind of evolutionary trends?

[Sarah] There has been, I guess, like this drift that you describe of scale of firm and then bifurcation. Structure incentives determine strategy, right? So if you have a big multi-stage fund and big fees, there's more of an incentive to hire people and get coverage. And investing a few billion dollars with a few million dollars at a time is not easy. You either do less work on the judgment and company building side, or you hire more people, or you invest more dollars at once. There's only so many vectors of attack. And to me, fundamentally, I think it's like very hard for a $5 billion fund to have skin in the game on a $5 million investment, versus think about investing 50 at a time.

[Harry] How do you advise founders then, at the early stage, when they have a large, large multi-stage fund, not naming names, genuinely, but like a large, large multi-stage fund, and they have a smaller boutique firm, what do you advise them?

[Sarah] I advise them to get educated about how these firms work and what the incentives are, and then make a decision about the type of help they want at this stage in the company. And people are going to make different decisions. But I think people should be both tactical and long-term oriented, right? The tactical is, who's going to move the needle for me over the next 18 months? And then long-term oriented, like, who do I trust and want to be around? And how should I sequence the base of supporters I have over the long term? There are real advantages to VC scale, right? I've experienced it. We know all of these people, coverage, reach, et cetera. But returns in most firms are dominated by a few good investors, even when the partner group might be 10 or more. And the complexity of interpersonal dynamics and decision-making in groups is not well understood by founders, right? And so I think there's real risk to good investment decision-making in big groups. Group think, seniority, overriding, like positioning and politics. And to be clear, again, not every firm, but it's a structural risk that happens. When I don't know how to solve a problem, I tend to make it simpler. Smaller firm, fewer people, only do what matters. It's also like much simpler for the founder to understand. I think there's education to be done either by investors, hopefully in an authentic and like a good faith way, or just by founders themselves. And to do references, I'm shocked that maybe one in five founders, like does investor references.

[Harry] How can founders educate themselves, do you think? Because when you say about the politics and the interpersonal dynamics, we both know the game. We both know there's some really interesting interpersonal relationships within different funds. But like, we know that because we're steeped in this day in, day out. How do founders get educated? If you're listening to this going, okay, I got a term sheet from two firms. How do I get educated, Sarah?

[Sarah] Talk to founders that work with those funds. The simplest thing is to do references. I think the other thing is like, as soon as you have people who know the ecosystem, who are on your side, you're so much better prepared. And so I think like the real question is like getting educated at the very beginning, right, with the seed or series A, and not trying to necessarily navigate it from first principles, but going and getting information from people who play in the ecosystem.

[Harry] The final one before we do a quick fire. Hunter Walke said that we've seen the death of the generalist seed VC. Do you think he's right in terms of saying that and being that binary, or do you think actually we'll still very much continue to see seed stage specialists that are horizontal and broad?

[Sarah] So just like for your listeners, Hunter's argument goes something like this. Tech is bigger. Networks are too large to own. Technical innovation matters more. Hard to be a generalist, right? I think we're aligned with this and that we're absolutely focused on being the best possible partner to AI-enabled companies. But as we've been talking about, it's a very execution-oriented, very personal game. And there are many different ways to be good as an investor at an individual level. Like you have talked to thousands of investors now, many of which are great in different ways, right? And when I think about some of my friends or the early stage investors that I really respect, some are more specialized. Like Eric Vischer is exceptionally good at enterprise infrastructure and tends not to do things he doesn't understand. That's great discipline. But others like Jim Getz has stretched from Palo Alto Networks to WhatsApp. Empirically, there are different ways to be good at this, including more generalist ways, or even my friend Elad, right? I learned a lot from him, but he seems quite versant and to have good access across a broad range of technologies. I tend to be skeptical of conclusive statements about VC strategy. It's a dynamic market.

[Harry] What have you learned from doing the podcast with Elad?

[Sarah] Oh, wow, that like media is a business. And our original thought was like, oh, we'll talk to our friends that are like doing interesting things in AI, and it'd be fun to do a low-effort content project together. And it has been fun, but like you would know one of the hardest working people I've ever met. But there's no such thing as anything that is like a high-quality, low-effort project. So, duh.

[Harry] Yeah, it doesn't exist. But you can do fewer. And then the hard thing is actually in the beginning, you need to do more. This is what people forget. We did three a week when we started, and we do three a week now. It's really important to get those numbers out in the beginning. I remember, you know, Sarah, when we started, the importance of reviews, like you really want to get reviews out because it will pump you up in the organic download charts because it'll put you higher and higher in the rankings, and you're noteworthy, featured. I remember going with three friends to a football stadium and having 500 Diet Coke cans strapped in like drinks, like rucksacks, and saying, we'll give you a free Diet Coke if you'll give us your phone for a review. And we spent like 50p each, so $250, and we got 500 reviews. We were like number two behind the BBC in the UK.

[Sarah] Amazing. Yeah. Oh my god, what a distribution hack.

[Harry] I don't think anyone's ever done it again, and I wouldn't recommend anyone do it. It was brutal, but crucial. So yes, it is a business. I want to do a quick fire round. So we're going to start with, will we be in a better or a worse place by the end of 2023, Sarah?

[Sarah] Assuming you're talking about the macro, like it's, I think most of the pain is yet to come. We'll still be ugly. There's a multi-year experiment of the fat startup and companies overcapitalizing, and they still have that capital, but they don't have the efficiency to yet create a really durable business. And so this is very myopically focused on tech startups, and have a worse place there. I think that will be gloomy for a while.

[Harry] What trend do you see that others are not seeing, do you think?

[Sarah] It may not be very well understood that a significant part of the opportunity for AI is services, not software market. So as a software investor traditionally, you're like, okay, here's the stack. There's chips and cloud infra and developer tools and observability and security and applications, and then all the consumer stuff. But I think it's a miss to be like, that's the opportunity for AI because we're doing more work that is today. And as you said, that opens like real questions in terms of labor displacement, distribution of wealth, but that is the opportunity from a productivity perspective too. Like both enablement and replacement.

[Harry] So help me understand, what's the opportunity there for us as investors?

[Sarah] Yeah, I think that it's easier with an explicit example. The legal profession today is a services market. It's not a software market, right? And if we do some of the low level work in legal services, it's a bigger pie than like software sold to legal firms today.

[Harry] Okay, that makes total sense. I'm fascinated. How much did the domain name conviction.com cost?

[Sarah] Yeah, I'd say I have a good domain broker and the fee base on a hundred million dollar fund is minuscule, so not that much.

[Harry] So you can buy one multi-stage firm and one seed firm, so one boutique and one multi. Which ones do you buy?

[Sarah] This is simple, right? You still buy, you buy Sequoia as the big dog incumbent that's executed really well and has really impressive culture over time. And I don't need to buy a seed fund. I buy my fund.

[Harry] You very strategically kept it all in the family. That was very political. Good. Well played, Sarah. You know what? I'm not going to push you. We're going to go for a short now.

[Sarah] I have too many friends in venture, Harry.

[Harry] Like you're not getting out of the, get out of the buy or the short. You can't get out of both buy or short multi-stage boutique.

[Sarah] I think that it will be a hard time for sub-scale seed stage funds without a differentiated strategy to persist. I think it was not hard to raise 10 to 50 million dollars for a couple years and it just will become more because LPs are going to become more careful given the turn in the cycle. Short on a multi-stage fund, I think early in growth investing is more different than it appears. And so I think there are firms that like tried the early stage investing route with a blanket based approach. And I don't know if that's going to turn out super well for Tiger.

[Harry] Thank you. That was perfect.

[Sarah] You just made me an enemy, man.

[Harry] I just don't worry. They don't listen. They hate podcasts and media. And what are you concerned by that others are not spending time on?

[Sarah] There are near-term abuses of AI that I think others are being thoughtful about. If you can do code generation, you can do malicious code generation. Other nation states and hackers are going to use every other tool out there. If they write code, they're going to write code with AI tooling today. And doing that at scale is dangerous. And so this is not that AGI safety is not important and interesting. It's just that there are today issues that are unaddressed and I think people should. I think we need to have more of a conversation around it and invest in defenses.

[Harry] What did you believe in investing that you no longer believe?

[Sarah] I am increasingly convinced that like it's not knowable what the outcomes are for companies like at the very beginning. It's specifically like how markets play out is unknowable because there are actors with agency determining how the market is structured. You or I could tell each other an intellectual narrative that holds together about like why structural advantage in some specific market like belongs to an incumbent or a startup or whatever. But it's just a convincing story. What really matters is the actors that are playing. And so I'm much more comfortable without knowing exactly how things are going to play out now or have been taught that.

[Harry] So I think this is why reserves are complete bullshit. Like when you look at reserves, it basically rests on the assumption that you know which are the winners within an 18 month time period, which I don't think you do. If I were to bet on my winners, many of them have gone to losers very quickly. Many of the winners have been slow burners for a long time. You're very good friends with Dylan Field at Figma. Figma was not an obvious overnight success.

[Sarah] No, it took three or four years to even show strong signal.

[Harry] Yeah, exactly. Do you have reserves and do you believe that actually reserves is efficient deployment of capital?

[Sarah] So part of being a really early stage fund is not really right. Like we are going to invest in the early rounds of a company and we're going to leave money on the table in the later rounds. And it's an explicit decision. But what it means is it's like very focusing. Like we make the bets we make with them. We're aligned with the entrepreneur and we're not going to grow our ownership from there. But we're also not going to be distracted by this question of like how do we be constantly underwriting our own portfolio? As you described, you may be one of the only people who admit it, but no multi-stage firm is like perfect at underwriting their own portfolio. It's surprising that they're not better, actually.

[Harry] I totally agree with you. Tell me, what would you most like to change about the world of LPs? You navigated the LP market with conviction. I can start. I can say I think GP commits are complete bullshit. And then most GPs actually then fund it through the fees, which then reduces their ability to invest in their own firms. But it ticks the box for LPs that, oh, they've got a 3% GP commit. Then I'm using your dollars now to fund my GP commit. It makes zero sense.

[Sarah] Yeah. Mine, I am very lucky with my LP base. People I've known for a long time and then like my founder CEO friends. So I'm grateful. But broadly, the LP landscape, it was educational. Like even though I've been talking to my prior firm's LPs for a long time, it's still very educational to raise money. If you are a platform like a Greylock or Sequoia, like it's not a lot of raising happening.

[Harry] Did you get exposure to LPs? Because most firms kind of shield you from it to prevent people leaving who are brilliant like you. And then having a ready-made network. I know many who don't.

[Sarah] I think Greylock is very small with a very tight relationship with its LPs and very happy to get to know a really high quality group of people. But the LP landscape overall is very clubby. Right. I'm sure you experienced this. Much like venture, a lot of investors, they lack individual conviction. They simply follow bigger brands. And so more independent thinking would be good.

[Harry] Tell me, will Trump win the election?

[Sarah] I think he's as likely to be in prison.

[Harry] Do you think so? Because I've had so many people on the show recently. I'm British, so I'm sitting far away. So many people on the show come on and say, I think Trump's going to come and win.

[Sarah] Yeah.

[Harry] Is Biden president again?

[Sarah] You're probably right that I've been insufficiently pessimistic about this type of thing in the past. Just facing criminal sentences now.

[Harry] Tell me.

[Sarah] I'm sure this is really amusing for the Brits.

[Harry] Relatively so, I have to admit. We did have a prime minister. We had three prime ministers in the space of 45 days. So I don't think we're one to throw stones.

[Sarah] Yeah, I guess you guys had a dark but amusing situation as well.

[Harry] We did. Who's your favorite angel to work with, Sarah? And why them?

[Sarah] It's been great to have a smaller fun and just be collaborative. I've been doing a bunch of work with Elad. I think he's a very independent thinker. It's something I value. He has good taste. He's a positive sum person. Learning from him.

[Harry] Final one. What does success look like for you with conviction? This was actually one that Pat suggested I ask you. 20 years out, what do you want people to say about conviction? What do you want to have achieved? I think about it a lot. I'm intrigued to hear yours.

[Sarah] So this is a scary thing to say out loud. Because like with any entrepreneur, big goals are always arrogant sounding. With the fund, it's a fund. The measure of performance is returns. And you can define that in different ways. But for me, I define it on a multiple basis, not an absolute dollar basis. Otherwise, I should have raised a larger fund. Let's put best in class venture multiples on the board. I think that's the first thing. We started talking a little bit about relevance. It's possible to make money without being relevant. And we intended to do both. We want to be part of very important companies. My name's not on the door. I want to build a partnership. And the question is, can we build a very small partnership that plays better as a team, makes better decisions, has better access as a team? Very simple to say, very hard to do. I think the last is, are we beloved by entrepreneurs? If those couple of things are true, if we're beloved by a set of the most important entrepreneurs of the next generation, then I'll be happy. And if I'm not productive, my partners can kick me out and I can retire. Great. There's a broader mission, if you're technically curious, which is, can we nudge use of AI in the world along? And can we nudge it to be productive and aligned and helpful? And I think we can.

[Harry] I cannot believe it's been six years since our last show. I hope it's not six years since our next show that we do. I've loved having you on. Thank you for putting up with my prying questions. I was much less prying in the first show. I think you were like, what evolved? But you've been a star, so thank you so much.

[Sarah] Oh, it's only fun if you do it.

[Harry] I love that episode with Sarah. And if you'd like to see the full interview on video, you can head over to YouTube and search for 20VC or sign up for the newsletter on 20VC.com.