Sequoia's David Cahn: AI IPOs will reset all private valuations — and energy needs deep IP, not just capital

Speaker 2: What's the only thing faster than the AI market? Your business on MongoDB. Don't just build AI. Own the data platform that powers it. Up next, we have David Khan from Sequoia Capital to talk about the state of AI. Good news. There's lots happening. So plenty to talk about, David. On. Welcome back to this show. Thanks so much for hopping. Guys. How you doing? Good to see you guys again. You guys got a lot of range from Zuck's castle to Pidoom. There's a lot of range. There's a lot of range. You think he's got a bunkie in the castle? Or do think he has enough bunkies? It seems like It's it's funny where he's got

Speaker 1: I think he's got a doomsday dungeon. Dungeon. Okay.

Speaker 2: The doom dungeon to go with Zuck's bunkie. Yeah. Cookies bunkie. Anyway, what is on the top of your mind? Because there's so many different things happening in the application layer. We had Cognition on. Harvey just raised a bunch of money. Like, things are going really well with diffusion and the actual

Speaker 1: application of the technology. There's value. Jobs apocalypse is delayed. And should he do and be factored into financial models for series a investments? Yeah.

Speaker 4: I think broadly in AI right now, I mean, the thing that seems really interesting to me is just the concentration of capital going into these big companies. Mhmm. It does seem like the thing top of mind for me is just like the way the venture landscape has changed. Yeah. When you think about doing this job five, six years ago, you had a 100 interesting companies that everybody was looking at, and you're trying to find the next one. And that's still happening, and yet so much of the conversation today is about the top 10 companies. Yeah. And then Yeah. On that point, is the biggest

Speaker 2: is the concentration of capital into OpenAI and Thropic, maybe XAI, SpaceX two, is that the biggest driver, or is when you're talking about reshaping venture, I've been much more keyed in on the fact that you get hugging face and open router, and there are now many Decacorn liquidity events that I would think changes the underwriting if you're a VC and you're like, yeah. It's an early round. It's a billion dollar valuation, but there are plenty of examples of 10 x returns at this scale.

Speaker 4: Well, I think, I mean, to me, that's always been the case. We were early investors in in Hugging Face. I think there's always been this thesis on you have a big community and you have a lot of bottom up adoption and that there's a lot of option value in those types of companies. I think you'll see that get reflected back into the market where there's always these companies where investors ask a 100 questions about what does this become? And yet you just have so much sucking sound from the market that those are gonna become interesting companies. And it's so hard to be relevant and build something important. I think Hugging Face did that and OpenRatter did that. And so I think they'll continue to be examples of that. The thing that's interesting to me just in this moment, and it's like the fall of twenty twenty six, we're about to see these IPOs, is this precipice of moving from so much capital. And honestly, this is not even like a tech market, DC market thing. Like the entire universe of capital has concentrated on this one sliver of the market, which is kind of pre IPO, late stage AI companies, and we're about to see that transition into the public market. And so I don't think anybody knows what exact how exactly that's gonna play out, but it does feel like we're on the precipice of something pretty interesting. It is wrong to think that it will play out as a

Speaker 2: binary one day liquidity wave. Correct? Because there will be lockups, and then many l LPs will receive their stakes and want to hold some venture capital firms, registered investment advisers will hold as well. So we're looking at, like, how exactly does that change the market? Because there will be the optionality of liquidity, but not necessarily actual cash on balance sheets ready to go into the next generation of startups.

Speaker 4: Yeah. I mean, one thing I've been thinking about it, you guys remember, like, 2021, you had, like, CrowdStrike and Datadog Republic, and then you're investing in, like, private CrowdStrike and Datadog. Right? And there was Databricks. Right? And you could go invest in Databricks, it was the same business model. Sort of understood how this thing was gonna trade when it was liquid. And I think that's what's interesting about AI right now is like there's no real holiday comps for any of these private companies. But as soon as one of these companies, let's say Anthropic is the first to get out, as soon as one of these companies gets out, then I think you actually have a better valuation framework for the rest of the market. And so I think it it is a healthy thing for the market when you kinda can look at the liquid. You can look at the illiquid. You see how these things trade, and it will it will provide a lot of clarity, think, to the private market. Why is why is SpaceX not a good comp for

Speaker 2: Anthropic, OpenAI,

Speaker 4: and then even the smaller firms? I think it is. I think SpaceX was the beginning of this. Obviously, it's held up really well. And for all the volatility and every Yeah. Yeah. Every day is my brother and I always joke of like, know, every day you see a news headline that's like stock was up 2% and it's like stocks go up and down 2% every day. Nothing happened. And there's always like some reason why it happened, by the way. You know, it's like, oh, it went up and down. I mean, SpaceX has held up well. You know, there have been liquidity unlocks. Everyone was super worried going into the liquidity unlocks in the media, and nothing it was, like, a nonevent. You know? We're we're we're still having to remember the day of the big unlock somehow

Speaker 1: traded up, like,

Speaker 4: 7%, if I remember correctly. Like, a short squeeze where all these guys are shorter than any one squeezed out. But yeah. So I do think SpaceX is the bellwether, and it's not to your point, it's not gonna be a one day event, but I think it's an exciting time that these companies are growing so so fast. I think there's a lot of demand for these companies, and it's gonna be interesting to see that play out. I think the second thing that we're paying attention to, and I think a lot of investors are focused on is just, like, the full stack of the data center build out that's happening. Yes. There's I wrote this blog post maybe a year and a half ago. Server, steal, and power are kind of the three pillars. Obviously, everyone's paying attention to the server side, which is chips. Yep. Steel side is the industrial side. You know, Elon now making his own gas turbines. Yeah. So there's a lot of emphasis on the industrial revolution component of this where you you know, we're out of we can't make more more of the components that go into data centers. And then, of course, the power piece where everyone's looking at, hey. We know how to get power for the next there's no there's no more power for the next, you know, twenty four months. And what are the what are the timelines? And with these CapEx, you know, these big CapEx projects, have to plan two, three, four years out. Who even knows what the world's gonna look like two, three, four years from now? So I think that, you know, deeper below the, you know, cusp of open ianthropic, the frontier models, just all the things that make them possible. And I think the market is pretty well educated on the compute market now and investors are familiar with all parts of the stack, but I think there's gonna be a lot of innovation all across that. Do you think that

Speaker 2: the opportunity in the grid opportunity in power plays out more like the neo cloud market than the rocket launch market? Like, I've always said, like, ah, it'd be amazing if we had an Elon of solar or even an Elon of nuclear. And there's some nuclear companies that are doing really well. Some of those founders could go on to build, like, the trillion dollar energy company. But it feels like everyone's focused on it. There's so much capital flowing in energy. Default would be very oligopolistic. Bunch of great outcomes, but not this winner take all behemoth. But what's your model for where energy and grid build out goes?

Speaker 4: Yeah. My mental model is probably closer to the Elon case than Neo Cloud case, and I can explain why. Yeah. Please. Yeah. I think on the Neo Cloud side, the primary innovation was financing. That's that's sort of how I look at it. Yeah. It's like real estate private equity deal. Yeah. Exactly. Like, we're buying a bunch of chips from Jensen, and Jensen, to his credit, was an amazing player in the ecosystem and has helped really build the ecosystem. He made Coriev what Coriev is today. There was sort of this moment where Coriev realized, we can buy these chips, you can finance them with Blackstone, somebody's gonna finance the GPUs. So there's still a lot a lot of financing innovation. Now there's a lot of companies that have followed suit. Obviously, you need to be a good good deal maker, but in some ways, you know, you could start a Neo Cloud tomorrow. You know how to do it. Getting access to power is hard. It's not easy, but there's 15 Neo Clouds. There's gonna be more. I think by contrast and and my partner, Sean Maguire, always has a great framework around this on the hardware side. He wrote this hardware manifesto long before hardware was cool. And he had this concept of, you know, in hardware, there's potential energy and these hardware companies spend five, six, seven, eight years building this potential energy. And it's because they're doing real, very difficult R and D work. And then at some point that potential energy converts into kinetic energy and that's when, you know, stock prices move. You see that with SpaceX, which took twenty four years to bake and you step some of these harbor companies. And so when we you know, at Sequoia, as we're looking at the energy ecosystem, we've sort of chosen a few places to to make investments. Sean was on the show talking about Valor, which is our nuclear investment. Last week, we announced our investment in company called Form Energy, which is doing grid scale batteries. That's a company. It was founded by the guy who ran the energy business. He actually started the energy business at Tesla. A guy named Yatmin Chang, who is probably one of the top three battery experts alive today. So just a very, very strong team. And they're nine years in. They spent nine years building these billion dollar batteries. They just signed up a a big project with Google earlier this year. And so and then you you you ask yourself, okay. Well, if we're gonna have a lot of solar and wind, are we gonna have a lot of batteries on the grid? I think the answer is yes. And then it's you have a company that spent nine years building IP to go put those batteries on the grid and then this unique moment to go scale that up for AI. So, anyways, I think there's gonna be to your question, like, I think there's gonna be three, four, five interesting kind of companies with deep, deep IP that you can go invest in. But I think it's different from the Neo Cloud space where what you really need is capital and access to GPUs. Whereas on the grid side, you actually need you ideally want some real fundamental IP that is that is difficult to replicate. Then, of course, you need access to capital. Right? So I think Yeah. On the nuclear stuff, what's interesting in a lot of these companies, it's interesting, you need to raise billions of dollars before you get to the promised land. And so that alone, one thing I say to founders, I meet a lot of seed stage founders in hardware. And I'm like, even if I think your IP is amazing, I can't invest if I don't think you can raise a billion dollars. Because you just won't get there. Right? And you'll end up getting consolidated. And so access to capital

Speaker 2: and and consolidating capital, obviously, is an important part of building these companies as well. What are you looking for? Like, what what what are the tells of a founder who can raise a billion dollars? Is it great storyteller?

Speaker 1: Is it just actual I mean, I Isaiah is like a a great example because even early on at the seed stage, like, honestly, if I look at the the the Gundot crew and I look at Augustus and Isaiah and their ability to sell you their vision was just on another level even before they had raised like $10,000,000. Like, when they were raising their first round, they they were just different. Like, they had a natural talent and then they've refined that. And you have to be in a category that allows you to sell this vision of a trillion dollar opportunity, a $100,000,000,000 opportunity, what that is. But I think you have that, like, natural talent and selling ability that is somehow inherent to some people. Mhmm. Like, there are people that are just way less compelling naturally and they get more compelling over time because they get more confident Yeah. In their business and round after round and hundreds of pitch meetings and meetings with candidates and they just get better and better and better. But then some people just start on,

Speaker 4: you know, at the at the 10 yard line and they just refine it a little bit, and then they can go from raising the $5,000,000 round to raising a billion dollars. Mhmm. Yeah. In our in our partner meeting, we actually talk about this a lot. I mean, naturally, this is probably the most important question that you have to get right in early stage investing. And the framework we often use is, would you go work for this person? Because I think everything is sort of subsumed in that. Like, if other people have to be willing to go work for this person Yeah. Decision of whether to go work for person is effectively putting a 100% of your equity in this one company, right? So would you put a 100% of your equity in this company? And often, you know, had Matteo, the former energy CEO come in, you have people kind of come and say, wow, like this person seems really serious. This person seems like they're, you know, they have an incredible track record. In his case, he had built the energy business at Tesla. Sort of done something that's really impressive early on in life. Then there's a clarity of thought component, which is, so sometimes pictures are coherent and sometimes they're not coherent, right? Like there's sort of a coherent story, which is like, okay, know, Form Energy is building an iron air battery. Iron's really cheap. Air's really cheap. That is why they're building an iron air battery, right? It's so simple and yet kind of makes sense. And then it's like, well, why do we need batteries? Well, you know, there's no sun out at night. You know, it's really simple things. And I think something we look for in a lot of these conversations with founders is a priority of thought. If you can articulate to an investor who's not the most sophisticated the investors are never the most sophisticated people around the table. If you articulate to an investor a very clear articulation of why this vision makes sense, why your plan makes sense, then you're gonna be able to articulate that to an employee. And then we have people like Sean who have PhDs in physics and can go incredibly deep on the science and technology behind it. And you sort of marry those two things. And I think that's kind of how we make these decisions. And we spend a lot of time with people. We spend a lot of time getting to know the founders as well. So Mateo, I'd known for six years before he invested. Sean knew Isaiah for a long time before he invested. Yep. That's right. You're not making the decision in a single in a single pitch.

Speaker 1: How are you thinking about trying to time the acceleration of the real world? Right now, it feels like it's much faster to do things on your computer. Mhmm. And it's creating efficiencies and a bunch of it for a bunch of people and and companies and all these things, but we're not seeing the kind of GDP growth that has at least been predicted. And it feels like in order to have that, we're gonna need to see, one, a general advancements of of models and and and AI models that can, you know, actually be a drop in sort of addition to your team or or or replacement or or whatever that ends up being. But but it feels like we're gonna need to make a lot of and do a lot of things in the real world to feel that acceleration. And even with, you know, the the launch of Astra, we haven't actually played this video on the show yet today, but somebody had basically hooked up Astra, like and it can just drive your car now. Right? And it's not designed to you know, it wasn't something that the model was designed to do, but the models are getting sufficiently advanced at understanding the world. And it feels like we're on the cusp of this, like, acceleration of the real world, which I think is gonna be way it's very a magical experience to, like, say, generate me an image of this scene in my head and be able to see it on your screen. It's gonna be a 100 times more magical to be, like, make this thing in the world, And then it just makes it. Right? And that can be applied to the real estate, to building widgets, you know, the the list goes on and on. But robots building other robots and building things, I feel like will be the greatest investment cycle ever and much more exciting for normal people than just, hey, we made this software feature, you know, in two weeks versus, you know, twenty weeks.

Speaker 4: Yeah. Two thoughts on that. I mean, one is I think it's so important to synchronize the timeline of your investment with the timeline. To your point on, like, you need you need to understand when the market opportunity is gonna convert, and, ideally, you're synchronizing the timeline of the company with the timeline of the market. So for example, if you're trying to solve AI power and you're starting today, it's kind of late. Yeah. We more power, like, literally in a year. So it's like, you've been working on that problem already for a few years. If you're trying to solve nuclear and that's a two thousand and forty's problem, great. You can synchronize the timeline of being an early stage company chasing opportunity that is really going to hit its inflection in the 2040s. So I think that synchronization matters. And then I think the second thing, you know, it is interesting that VCs have really shifted toward hardware investing, right? Like there's this broader trend. I think Andrew came on the show and talked about SendCutSend. Like we've been doing a lot of stuff in the hardware, industrialization space. Part of that is because of this feeling that the timelines are so fast in the digital world that it's hard to create moats and it's hard to create value. So I think there's a reason why in hardware, there's a feeling that you can create moats over many, many years. And eventually, obviously the ultimate moat to your point is going to be the machine that makes the machine, right? It's the re industrialization of this country. And I hope we're going get there. I think we're going to get there. I do think sci fi kind of preempts reality. And so Isaac Asimov obviously imagined the most in iRobot, the most valuable company in the world is a company that makes all the robots. And there's a reason I think a lot of investors own Tesla for that reason, because they think that he's going to win an optimist. So anyways, I think there's a lot of companies that should benefit from acceleration in the physical world and there's a lot of investment going in there. That's awesome. Well, thank you so much for coming on the show, breaking it down for Excited you

Speaker 2: to have you back soon. Always a good time. Great to see you. Have a great rest of your day. We appreciate the takes. We'll talk to you soon. Let me tell you about Console. Console builds AI agents that automate 70% of IT, HR, and finance support, giving employees instant resolution