Alex Rampell on building defensible AI businesses: greenfield bingo, software-does-labor, and why the best entrepreneurs have revenge or redemption as their fuel

have been some updates to Claude's policies. Tyler is researching the story now. and we will get to it as soon as we can.

Uh well, we have Alex Rampel from Andrew and Horowitz coming in Ultradome. Welcome to the show, Alex. How you doing?

Good. How are you?

Beautiful background. Uh fantastic American flag. What What a day. Congratulations. How are you doing?

Good. Good.

Fantastic.

Uh super excited to have you on. I've uh I've enjoyed uh you're somebody who's I' I've uh read your writing and and listened to your your podcast appearances for a decade now and and always always appreciated your your point of view on on a bunch of different uh things. So, welcome to the show.

Yeah,

thank you. Yeah, I'm I'm here to prove that I'm real.

Fantastic. I mean,

it's like proof of life is very important increasingly, right?

Yeah. Yeah, it is. Uh I mean first time on the show. Can you uh give us a little bit of the backstory, the journey to Andre and and uh and how long you've been there?

Sure. Uh so I've been here for 10 years. Um previously been a long time

success.

Uh previously longtime entrepreneur. So kind of started by writing software when I was a kid in high school. Actually even before that.

Um and then out of college I was like I graduated in 2003. I was probably the only person from my class that just kind of became an entrepreneur right away. Yeah.

Um, and it wasn't because I was smart or dumb. Probably more dumb than smart. It's like I had a little business that I was running in college. So, kind of kept doing that. Met this guy named Chris Dixon.

Yeah.

Who was at Harvard Business School when I was at Harvard College. And you have to remember like 2002 when we met. The internet 1.0 had just died. Everybody lost their jobs. It was September 11th. It happened. And what do you do if you're a dried up entrepreneur? You go to business school. I remember there's a company called Cosmo.com, a huge hit that kind of went to zero. What did that guy do? He went to HBS.

No way.

So Chris Dixon was there. Um and he and I were like the only two people I I swear in like the entire state of Massachusetts that thought that the internet was still kind of cool. We got introduced by a mutual friend. Um had had a coffee at Aubon Pan, this like little East Coast chain,

and then cooked up uh a product called Did They Read It, which is still around today. It's an email tracking tool. It embeds a tracking pixel in every email that you send out. Um that did pretty well. Then we started the ventureback company together that became Side Adviser and that got acquired. And then I started another company called Trial Pay

to um like the thing that we learned at Side Adviser is that nobody likes paying for software. Like you're willing to pay for an intangible good like a glass of wine. $20 for that seems totally reasonable, right?

But paying $20 for one song on iTunes, there would be riots in the streets.

So the idea was I'll give you this digital good for free if you buy something else. M

and if you know how affiliate marketing works, it kind of plugged into that. So it's like, hey, we'll give you this product for free if you sign up for Netflix or if you switch to GEICO or if you shop at the Gap or if you get a Discover card using the affiliate commission to go pay for the product that did pretty well. Like it was like half of the revenue of Side Advisor. It it was like for my from my little shareware business that I used to have back in the day. It doubled our revenue. So I turned that into a company called Trial Pay. Um that did great for a while. Then it did terribly kind of resumed to okay, sold it to Visa. Then along the way met this guy Max Levchin um after he had sold slide to Google and we cooked up a company called a firm. So I co-ounded a firm with Max in 2012 um and actually brought a firm to and Horowitz as a funding opportunity which which they did.

Um and Chris Dixon kind of ended up talking me into joining here in 2015. So I've been here ever since. Uh how how quickly did you realize that that uh Chris and Max were special? Because I imagine you you during those two periods you were meeting hundreds of different people. I'm sure people wanted to build stuff with you, other entrepreneurs. Uh and you picked well uh back to back uh and uh it's probably the hardest hardest uh you know one of the hardest things to actually clock at times.

Yeah. I mean I I think a lot of the greatest people they have two things in common. they have this term that that's going around a lot like high agency like they don't just like follow the rules they just like take matters into their own hands and do something. Um, and then they just kind of know the history of everything before. Like they they just like students of history, philosoph like, you know, Chris was a philosophy major. People don't know about him. He went to like he he went to, you know, he got his bachelor's degree in philosophy, was going to do a PhD, kind of realized that was a bad idea. Um, and then eventually went to business school, which was he will probably say the worst idea. But, um, yeah, it was kind of self-evident. I mean, Chris and I I mean,

the history the history thing is a real thing. Like if if you're talking to an entrepreneur that has been building their business for one to two years and you can tell them companies that in somewhat recent history in the last decade even that have like attempted that or companies that are adjacent and they're like oh I'm not familiar with that. It's like immediately like such a bare signal because the red flag or the opposite like that's the red flag. the whatever the opposite. What's the opposite of green flag? That's what I'm saying.

But yeah, the green flag never flag. What's the green flag?

The the green flag is not only have do I know everything. Um I mean I'll give you one example. I think the Collison brothers went out to like Dehawk's ranch.

Like Dehawk started Visa. He's kind of like a weird quasi communist even though he started one of the biggest companies in the world because Visa was meant to be this like it was a nonprofit. Visa was a nonprofit until 2008

I don't know 2008 maybe 2009 it was the biggest IPO yeah

that's right

yeah but it was a nonprofit until then um a nonprofit like the NFL is a nonprofit like it makes a lot of money but it's owned by the constituents and the constituents that own Visa were the banks

and it's like okay I'm starting a payment company there were a lot of payment companies that came before but it's like who will that let's find this guy who's 90 years old who's moved outside of capitalism is working as a farmer just to learn from him and like I have this mental model that I now use for entrepreneurs and it's a memo that I've written that we use internally a lot. I got to say like the best entrepreneurs they have five things that that I look for. They can materialize labor capital and customers and hopefully those are self-evident like you can get people to quit their highpaying job for like certain failure. It's like the Ernest Shackleton thing. It's like you wanted men for dangerous journey almost certain failure and death but if it worked you might be famous right it's like you want that very very hard to do you have to find people that can materialize capital it's like get people to give you money and the best the best sign of future fundraising success like if we do round end we want to make sure there's going to be a round n plus one or you're going to be profitable on round end which is unlikely so are you good at fundraising can you get customers like imagine it's like I have two weeks of cash left please be my first customer I have none like who it's very hard to pull that off

then you want to know the history of the space, which is super important to your point. You want that green flag version, not just the intermediate, you know, what's the what's the the combination of green and red flag like the tur you don't want the turquoise or the whatever

like you want the green flag. This person knows everything that's tried before and they have a new angle of attack. They're not going to learn on the job. They've actually learned through history. And then the last thing that I care about a lot, um, everybody in my my team knows this. My favorite book is The Count of Monorista by Alexander Duma

and it documents the story of this guy Edmund Dantes who's like wrongfully accused is like in prison for 17 years but then becomes the richest person in the world but doesn't give a [ __ ] Right. It's like all the all the riches in the world do not matter. He wants revenge.

Yeah.

Right. He or so you could either revenge kind of sounds bad like Old Testament but you either want revenge or redemption. And some of the best entrepreneurs have this in common. And the reason why it's so important from a venture lens is imagine that you're a 20-year-old kid. You start a company and somebody offers you, I don't know, half a billion dollars to buy your company and you own 25% of it. You're going to make over hund00 million. You'd have to be insane to turn that down,

right?

Yeah.

And we need people that are insane that that actually are going for it's not that we don't want people that aren't capitalists that don't care about money, but it's like they care about if you've seen the movie Space Balls, it's like we're not doing this for the money. We're doing it for a shitload of money. Little little different here. It's I'm doing it for another reason. And like a great example of this is there's this guy Renault Lelanch who started a company called Lending Club.

Oh yeah.

Um very famous company at the time. There was like a der of IPOs. Like Lending Club kind of gets to scale, goes public. He gets fired from his board, ousted from the company. He's probably made hundreds of millions of dollars. He's the count of Monristo. He's like, you know, [ __ ] those guys. I'm going to start a new company. I'm I'm going to start an upgrade. And you know what he called his new company? Upgrade. It does the exact same thing as Lending Club. It's probably 10 times the size of Lending Club now. And what's motivating him is not just the hopefully, you know, [ __ ] ton of money space falls quote,

but he wants revenge.

Yeah.

He wants redemption.

And you see this with some of the best entrepreneurs like what is the driving motivation because when times get tough, like you need something because like there is no money. Like if if your company's going to zero, uh if you're Eron Shackleton in the winter of Antarctica, like your voyage is not successful, right? You you need something else driving you at that point and that's why that

that metal is something that that I I find extremely valuable.

Have you seen Space Balls, Jordy?

I have not.

You got to famous I famous I famously have seen

he's seen no movies. He's not a

question.

One of my uh probably like a I really I was going to say maybe I it's hard to exactly place a top 10 like I I loved your episode on uh invest like the best on operating systems. How is AI kind of like updating your thinking on modes and operating systems and uh how somebody can create a lot of value with a startup?

Yeah. Well, I I think um well, maybe I can rewind a little bit and just because we announced this new fund raise, I can tell you exactly what we told our LPs in terms of like what we want to invest in at the application layer because I I do application layer stuff. Um and it's really three things. You know, category one is I call it green field bingo. Um, and kind of maybe another way of answering your question is there's something that there's a quote that I use a lot. The best companies have hostages, not customers, right? Like that's why nobody likes using sales.

You got to be taking revenge. You got to be taking hostages.

You know, it's it's very old testament stuff. But the best companies have hostages, not customers. Those are great companies to invest in, right? And that kind of goes to to to the point that I was making like you know Netswuite, Workday, Salesforce, like they're all hated by their customers, but none of those customers can leave.

However, if you build a better version, like kind of a more AI first version of all of these companies and you're selling into the green field,

um you've got a shot, right? Because like I was the lucky enough to be the first investor in Mercury and Mercury worked not by stealing people from SVB. They just worked. It's like, oh, you're a brand new company. you can use shitty SVB or you can use really good mercury and that worked. Whereas they never got customers from SVB until the weekend that SVB failed. Yeah. Um so that green field opportunity for software like that is AI enabled in the same way that like that was true for cloud, right? That was true for mobile. It's like here is the new thing. The incumbent will eventually build it. Like another expression I use a lot is like the battle between every startup and incumbent is whether the startup gets the distribution before the incumbent gets the innovation. The incumbent my my default assumption is that the incumbent normally wins. Mhm.

Because they have the distribution, they will get their act together three years later and with AI and cursor and everything else, they'll get their act together maybe three weeks later.

Yeah.

So that the the the the kind of the might of distribution is very very powerful. So one option is you just go into the green field. So that's kind of category one is you know we we call it green field bingo. It's just like build. We we have a bet that's just like Netswuite. It's better. It's AI enabled. But they're not going to steal customers from Netswuite. they're just going to get green field. Category two is this kind of new super exciting category of software does labor and like there there is no incumbent software product for I don't know trial attorneys like it's called Microsoft Office but like Eve does that and does that really well there's no incumbent software product for dental office receptionist but tenor does that and does that very well so that's a really these are all industries that I wouldn't say they've been untouched by software they've been untouched by specialty software

and The reason why is because the market was perceived to be too small.

And this is exactly what happened to SAS. Like fintech really changed SAS significantly because take I'm sure you've heard of Toast. Um Toast is one of my favorite businesses. It's like Square but it's only for restaurants. It's this whole operating system for restaurants. How many restaurants on their IBM PC Jr. in 1984 use software? Like zero.

Yeah.

And how many of them would pay tens of thousands of dollars a year for software? Zero. But they all need payment processing. They all need payroll. They need these other services. You kind of bundle them in with software. And this is the really exciting thing about AI is you go say, "Hey, trial attorney, uh, I want you to pay $50,000 a year for software." He said this 10 years ago. Like no way. Like we'll pay for Microsoft Word because we use it to write demand letters. Like that's it.

And now you can say, "Hey, we'll handle all these cases for you that you could not handle profitably." And that's AI plus software. Now they are software buyers. So that's category two. And then category three, I call the walled garden. And I wrote a post about this a little while ago, but walled garden businesses are amazing because if you assume that in the world that we live in today, and this is another way of thinking about kind of um defensibility in AI, open AI has their sights kind of on everything, right? Like anthropic probably has their sites on everything. It's so easy to build everything.

So I don't know, have you guys heard of Open Evidence?

Yeah.

Yeah.

Okay. So, I I tore my Achilles uh in February, so almost a year ago.

Sucks, right? It's all better now. Um

it was I was skiing in Japan.

There we go. That's a good reason to That's a good reason.

There we go. There we go. Um Termite Kelly's what do I do? So, I go to Chat GBT. I'm in like the the clinic in Nico, Japan, talking to this Scottish doctor and he tell me, "Oh yeah, you only have surgery in the US. Nobody does it outside the US." I was like, "This guy's on crack." Like, of course you have surgery to fix an Achilles. I go to catch it, he tells me everything. Um then I think I find this thing open evidence and it's like chat GBT but it has every single medical document in the world and imagine that tomorrow chat GBT 53 comes out it's AGI everybody agrees it's AGI human race is over but it has no medical data and then on the other side you have GPT 3.5 and it has every single piece of medical knowledge ever known to mankind. What would you rather use?

And the answer at least for me and I I did use this is open evidence. There's so many businesses that look like this where they find some proprietary piece of data.

Mhm.

They're the only ones that have because before you would have to sell data. That was like your only that was your only hope as a business. Um and like another example that I mentioned in this post, there's a company called VLEX and VLEX is this like 25-year-old European data business that bought up, you know, legal records in Spain to start and they would sell it to firms like Wilson Cinci that needed it for case law. Um, now they sell an outcome because they're the only ones that have all the the records. So you can char you can build a really interesting business if you're the only source of some unique form of data. And I love businesses like that because that's the other sorry for being so long-winded here on the answer to your question, but um the the the businesses that can be very very large in AI that can grow very very quickly, you still need to make sure that they're fundamentally defensible. And that's the really hard thing to disamiguate today, which is you can have things grow so quickly, but they can also go to zero so quickly because anybody can build software in like a weekend, which is both great and terrifying at the same time.

Yeah, indeed. Well, thank you so much for hopping on the show and breaking it down.

Incredible overview.

Yeah, great to meet you.

We'll talk to you soon, Alex.

Congrats. Have a great rest of your day.

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