20VC: Benchmark's Sarah Tavel on Are Foundation Models are Commoditising | Why Frontier Models Will Be Closed Source | Why the Value is in the Application Layer | The Future of AI is "Selling the Work" Not the Tools

Sarah Tavel
You just see the tremendous amount of investment that has to happen right now in order to progress these models because at this point it's kind of compute constrained. You just see the progression where each successive model is going to be more and more expensive to train. That suggests a world where you're going to have an oligopoly. If you want a model that's on the frontier, that's going to be closed source. I just am a huge believer that the application layer is going to drive most of the value.

Harry Stebbings
This is 20 Vc with me, Harry. Stabbings and today's show is incredible. Sarah Sarah Tavel joins us in the hot seat now. Sarah is a general partner at Benchmark. One of the best firms in venture period.

Such an incredible discussion here on application. Layer versus infrastructure layer on where sustainable. Value will be generated between the two. And then a behind the scenes inside the benchmark model, how they find, win and help companies be their best. You can check out the full video.

Stabbings
On YouTube by searching for 20 vc. That's 20 vc. But before we dive into the show today, we're all trying to grow our businesses here. So let's be real for a second. We all know that your website shouldn't be this static asset.

It should be a dynamic part of your strategy that really drives conversions. That's marketing 101. But here's a number for you. 54% of leaders say web updates take too long. That's over half of you listening right now.

And that's where Webflow comes in. Their visual first platform allows you to build, launch and manage web experiences fast. That means you can set ambitious marketing goals and your site can rise to the challenge. Plus, Webflow allows your marketing team to scale without relying on engineering, freeing your dev team to focus on more fulfilling work. Learn why teams like Dropbox, ideo and orange Theory Trust Webflow to achieve their most ambitious goals today@webflow.com.

And speaking of incredible products that allows your team to do more, we need to talk about secure frame. Secureframe provides incredible levels of trust to your customers through automation. Secure frame empowers businesses to build trust with customers by simplifying information security and compliance. Through through AI and automation, thousands of fast growing businesses including Nasdaq, Angellist, Doodle and Coder trust secure frame to expedite their compliance journey for global security and privacy standards such as SoC two, ISO 2701, HIPAA, GDPR and more. Backed by top tier investors and corporations such as Google, Kleiner Perkins, the company is among the Forbes list of top 100 startup employers for 2023 and business insiders list of the 34 most promising AI startups of 2023.

Learn more today@secureframe.com. Comma. It really is a must. And finally, a company is nothing without its people. And that's why you need remote.com.

Dot Remote is the best choice for companies expanding their global footprint where they don't already have legal entities. So you can effortlessly hire, manage and pay employees from around the world, all from one easy to use, self serve platform. Plus, you can streamline global employee management and cut HR costs with Remote's free HRi s. And hey, even if you are not looking for full time employees, remote has you covered with contractor management, ensuring compliant contracts and on time payments for global contractors. There's a reason companies like GitLab and Doordash trust remote to handle their employees worldwide.

Go to remote.com now to get started and use the promo code 20 VC to get 20% off during your first year. Remote opportunity is wherever you are, you have now arrived at your destination. Sarah, I am so excited for this. I always love our chats. So first, thank you so much for joining me today.

Sarah Tavel
No, thanks for having me as always, Harry. Well, I want to start. For those that do not know, how did you come to be at benchmark? I love a good story, Sarah. So, like, did they call you up.

Harry Stebbings
And they're like, hey, do you own benchmark? Is it over a dinner? Like, talk to me. What was that courting process? So it's a very serious decision for us when we bring on a new partner because it's, you know, it's a small, very small group right now we're five general partners.

Sarah Tavel
And so it's a very deep getting to know you process how it started. Initially, Peter Fenton reached out to me and we grabbed a coffee at sightglass. I was at Greylock at the time. He just mentioned that for whatever reason, they wanted to get to know me and kind of talk about what it would be like to partner together. I said no, I just didn't like, Greylock was just a great group of people.

They'd been nothing but great to me and I'd been there for a year and a half or so and it just didn't feel right to me at the time. And so we kind of parted ways. And then they smartly had Rich Barden call me. I had met Rich at a prior event. Rich is the CEO of Zillow.

And he called me up and we talked about it a little bit because he knew the benchmark crew very well and he basically told me he's like, look, what do you have to lose by spending time with the team? If you want to be great in this business, see how some of the greats practice the business of venture capital. When he said that way, I just felt like, you know, he was right, that what did I have to lose by getting to know the team? And then, as I did, then start to get to know the team, see what felt so different to me about the way benchmark practiced partnering with founders in this, like, very small equal, a very committed way of doing things. It was just one of those things that once you saw it, you couldn't unsee it.

Thankfully, stars aligned and they felt the same way. And so it's been almost seven years now. I promise we're gonna get to AI, but just. I've just got such a man crush on Peter. Okay.

Harry Stebbings
He is so amazing. His brain is just majestic. You've worked with him now for a number of years. What makes Peter Fenton so good? Do you think Peter has so many incredible skills?

Sarah Tavel
One of the things that you just see for Peter is just a relentless learning mindset. Like, he is always reading something new, listening to a podcast, internalizing all that information. Right now, I think he's taking graduate courses and some subjects that we don't even. That is not even relevant. It's not like an AI class.

It's kind of further afield. He has that incredible orientation, the curiosity that drives, I think, some of the best to always be learning. And then he has just many superpowers, you know, the one that you always can't help but feel. And every time I'm talking to a candidate for one of my companies and trying to close them, I feel like I channel everything I've learned from Peter because his EQ around people, what motivates us, what drives us, what holds people back, and how important that is in the arc of any company that we end up investing in this, watching, helping those founders become the best version of themselves. I think he's not one of the best, but the best at doing that.

Harry Stebbings
I remember Peter telling me that the best VC's are a combination of hypercurious and hyper competitive in one final one before we do move into the meat of the show. You've now been doing venture for a long time, between the first in, obviously, with Bessemer, then the second with Greylock, and now benchmark. What do you know now that you wish you'd known when you started in Bancha? The thing that comes immediately to mind for me is just the importance of the why now? It's such a cliche question, right?

Sarah Tavel
There's always a slide when a founders pitch in, which is like, the why now? But the pointedness of that why now? How real that is, whether it's a technology catalyst, whether it's something, you know, some other current crypto coming out, that why now story is really so important. Because what you just realize is that when you have a strong why now? To me, it's like this strong current that just pushes the company forward.

We always say that being a founder and going through hyperscale is all about making new mistakes, not making the same mistake twice. And the resilience that your company has of being able to make mistakes, and it almost doesn't matter. The current pulling the company is so strong. That is just something that once you see it, you can't unsee it. The best founders take great currents and maximize that opportunity.

But when you don't have enough of a real why now? It just feels almost like you're, you know, you're in a boat and you're just having to paddle really hard and not make a lot of progress. Do the best founders not will markets into existence? I don't think so. I would love to think so.

And just to be clear, why now doesn't necessarily mean a trend. It can be an opportunity that's catalyzed by a new technology, like we're seeing now with AI. But without that and just a new idea in an existing market, it is a force of will and a very, very difficult to really create big opportunities that surprise, I think. One thing I find hard about it, honestly, Sarah, is like, the why now needs to be sustaining as well. And, you know, so I looked at.

Harry Stebbings
I did be real's pre seed or seed round, whatever the first round was. And I was like, the why now is authenticity. The need to feel like you could be yourself in a world of depression, anxiety on social media, the why now is quite clear. And I could intellectualize myself into it wasn't really a sustaining why now? I find that hard.

Would you advise me on anything on that? I think part of you have to contextualize that desire of the authenticity, which I totally agree with, with the countervailing current, which is TikTok being a black hole for people's minutes. You know, Instagram, like, all the other competitive forces, like what? What happened with be real, in my estimation, is that they did capture that why now of the authenticity, but they could never earn the right to enough minutes for a consumer, because the consumer was then having, you know, the dopamine hits of the most addictive atomic unit we've ever had in social, which is the, you know, short form video, you know, powered by an algorithmic global maxima feed. You're competing against that.

Sarah Tavel
And so if you have that authenticity, why now? You know, that's a little bit against this, like avalanche, pretty difficult tidal wave should be instead of avalanche. But you get the picture. I totally get the picture. And I feel like you should be TikTok CMO doing banner adverse.

Harry Stebbings
The black hole of minutes really just captures that consumer zeitgeist. Listen, I want to discuss AI today. We mentioned the TikTok algorithm there. Most people talk about AI today and they talk about it being this sustaining technology. I'm really interested to start there.

Do you agree with that as a positioning as a sustaining technology? There's a lot of truth to this. I think part of where this meme has come from, everybody talks about AI as something that advantages the incumbents. And when it advantages the incumbents instead of the disruptors, which are startups, then it's a sustaining technology. And there's no question that I have personally never seen in my career a time when it has been more true that it's been this race.

Sarah Tavel
You know, it's always a race of the incumbent to get innovation before the startup guest distribution. It's just been so easy for incumbents to innovate because it has effectively been for this first wave of AI use cases, just implementing an API from OpenAI. If you are notion, if you are Adobe, instead of having to adopt a new product to do image generation or a new product to do summarization of content, you can just use notion or Adobe and get access to that technology. That's very much a sustaining way of using the technology. The way I divide the world then is that if it's existing employees and their existing workflows, AI technology is going to be sustaining and it's going to drive tremendous market cap for the incumbents.

But that doesn't mean that there aren't disruptive opportunities for startups leveraging AI. I think that the difference is that you have to really change the mental model that you and I have been trained to kind of think about startups for a very long time. And there's kind of two veins to that. The first is, you know, we're so used to software, thinking of software and application software in particular as this like productivity improvement product. So you and I adopt a new software product.

Let's take notion again that lets us collaborate with our peers in our company, that makes us more productive in the work that we have to do. Then you think about AI and it's back to increasing my productivity. So now instead of having to write a whole paragraph, I can take my bullet points and expand it and boom, that makes me much more productive. And that has been all of application software for the last 25 years. But if you realize that what AI enables is actually a very different unit of work that you sell, which is doing the work, and so you're almost a software company that looks like a services business that is able to sell like the full work product, that the outcome, as opposed to selling software that an employee has to learn to use and then gets a productivity boost from.

And this is very disruptive to incumbents because incumbents are used to thinking about selling per seat and pricing per seat based on the cost of the headcount. But if instead you're selling something that doesn't require a seat, that is like a very disruptive opportunity for startups. A couple of things I just have to dive on here. You mentioned kind of selling the work and being able to do that. You know, we obviously had Sam and Brad on the show and he said very openly, the models are not good enough.

Harry Stebbings
Simply put, today, are we anywhere near a situation where for enterprise workflows, it is able to sell the work end to end where we do not need to do the work itself? It's a spectrum. There are certainly use cases that can be automated. Right now we see a lot of them met a company the other day that is automating HR ops. You have companies in recruiting and sales, like all different facets, where there is specific types of work.

Sarah Tavel
And I always think of it as like unbundling the employee. So what are the different work products that an employee has to do? Definitely there are work products that are automatable right now. That is not to say that, you know, if you're Sam and your brain is thinking about the next horizon, GPT five to work beyond that, there is no question that as the foundation models improve, we're going to see the ability to take on more and more complex tasks. But even now there's still work to do.

Then there is like this question of having a human in the loop. And that's the way that you see some companies bridging the gap right now. Either an employee in the loop, I prefer the model where you have your own employee as like the AI software provider in the loop that is doing the QA work that bridges the gap until the models are able to do it on their own. I have to touch on the element you said there about kind of doing the work instead of like selling on a per seat basis. Do we not just see Cooley or the PwC, KPMG, any of these kind of large firms that sell kind of traditional services to businesses?

Harry Stebbings
Do they not just adopt the work creation tools, but then charge back to their clients the same hourly rates and just become better businesses themselves? I actually think about marketplaces. There's lessons to learn there. You have to divide the world between the incumbents and like the hungry non incumbents that want to become the incumbents, right. New technologies, more often than not are best served for the group of hungry up and comers that want to become the new incumbents.

Sarah Tavel
You're going to see a class of companies that realize that if they're early adopters of this technology, they're able to come in with a very different pricing structure. They're able to do things faster than the traditional firms and so they're going to be the ones that are hungry and having a cost advantage that they pass on to their customer that lets them grow their market share. This is common trope invention, which is like, and you hear it the whole time. Ah, the infrastructure layer. Super exciting.

Harry Stebbings
Application layer. No, no, no. It's a fool's game. And I'm just intrigued. Listening to you there, I'm like, that doesn't really sound the line to you.

How do you determine where value is in the application layer and where it's not? And where would you advise me? There's treasure here and there's not here. I just am a huge believer that the application layer is going to drive most of the value because what you have to imagine is who owns the user over time. If you own the end user, you're able to provide more and more value to them over time and capture that value.

Sarah Tavel
There's, you know, and we could talk about what happens to the underlying models. There's certainly just incredible intense competition. Is it going to be an oligopoly? Is it going to be, you know, we can, we can talk about those, those subjects. But like, I focus on the application layer because I do think that's where just a tremendous amount of value ends up being captured and created.

Harry Stebbings
Brad said, the question is, are you excited by a hundred x improvement in OpenAI? If you are, you will be sustaining technology? Yes. If not, Sam eloquently put it, we will steamroll you. Yes, yes.

Stabbings
Do you agree with that? And do you think about that when investing in the application layer and the defensibility of it today? Oh, absolutely. I think all the companies that we invest in will only get better as the underlying models get better. They'll be able to take on more work over time.

Sarah Tavel
They'll be able to have better and better margins because they won't have to have a human in the loop if they do. That is part of what's so exciting about what's happening right now. But one thing that does worry me is you're right, and you've said it before about user experience being better for a lot of the application startups and the incumbents who are trying to kind of embrace those technologies too, or those products too, but they're not like five x or ten x better. They're like 15 or 20% better in a lot of cases. But the distribution of incumbents is so strong that Microsoft can just bundle it in and enterprises will adopt.

Harry Stebbings
How do you think about the distribution advantage of enterprise versus the user experience advantage of startups and what ultimately wins? Yeah, I think this is exactly the challenge of the first wave of AI. Startups have had maybe a framework that I think about a startup and the product that they're bringing out into the market. And like let's imagine you have a hundred percent of the value, like where does that value come from that provides that underlying service? The first wave of these AI companies, people would talk about them as a, like, you know, wrappers around an LLM.

Sarah Tavel
But what that essentially meant is that if you have 100% distribution, 90% of the value that the startup was providing with their product was actually provided by OpenAI. And in that case, yes, you have 10% where, you know, you get the benefit of focus, you can do, you know, you build functionality, workflow around the model. But at the end of the day, if you have a notion again to our earlier conversation that can just add that feature and then have it contextualized by all the value that they're creating with their application, that's a really, really hard battle to fight for a startup. But what is exciting is that there's now the new wave of companies that have really internalized what's possible with AI that are coming into the market with a very different distribution of value. They're owning more of the workflow, they're doing more of the work to kind of prepare something to create a new experience that wouldn't be possible out of the box with any of these APIs.

Those are the types of opportunities that we get really excited about at benchmark. I mean, speaking of the Keanu companies that you get excited about, we're seeing real revenue from some of these companies as well. I just use this show as an advice column, really. I don't know what's the experimental enterprise budgets and what's a real commitment by enterprise, that this is an ongoing tool and part of their workflows. How do you determine between a large incumbent saying, hey, let's try it with a POC and experimental budget versus a commitment to use it?

Harry Stebbings
Ongoing? You described this specifically for the enterprise incumbent, and I think it's too early to know. For that enterprise use case, what you're seeing, where most of this adoption is happening is the mid market and down this kind of digital native company, the SMB, the hungry companies that are hungry for market share and growth. And for that group, there's two things that you think about, which is, number one is the value proposition, something that feels enduring. So let's take a company like Deepell as an example.

Sarah Tavel
One of our investments Deepell provides, they were kind of very early in providing this API that provide instant human like translation products. It used to be that you'd have to hire translators for so much of the work that you'd want to do. So you're a big enterprise or you're a company, you have all these documents that have to be translated. You literally would hire human translators to do it because Google translate or those other options were not good enough. And so deepel comes in and they provide like the best translation that feels like a human did the translation and provide it instantly.

Okay, is that a value proposition that from first principles you think is enduring? Absolutely. And then you also end up getting to look at the early cohorts for these companies. And that's usually where you see the most evidence of is this an experimental thing or is this something that's going to really endure? And the combination of those two things helps to inform those decisions.

Harry Stebbings
What about the early cohorts would suggest one way or the other? Is it purely a usage? What would signify one way or the other? Yeah, I find it's the depth of usage and then just continued engagement with the product. And oftentimes we're investing where the cohorts are so young, you are taking a leap, but there's still enough evidence in the beginning of, like, something is working, people are using it.

Sarah Tavel
I always think of the Shawn Ellis product market fit question. How disappointed would you be if this company disappeared tomorrow? There's a hint of that always in the cohorts that you look at. One thing that's hard for me also is differentiation. There are so many AI customer service tools, there are so many AI sales agents, and I'm like, and they're brilliant teams, and I'm like, ah shit.

Harry Stebbings
How do you think about separation, differentiation between the ten players in each and where you want to place your bet or not? I think this is the single hardest question right now. It is true that there's a land grab, gold rush, whatever the analogy is that you want to say. And part of the challenge also of this question, Harry, is that some of the response for a lot of companies is just to raise bigger and bigger rounds so that they have the resources they need to buy the GPU's or whatever it may be. I think it's the single hardest question it is about the founder that you invest in now more than ever.

Sarah Tavel
And I think it's just you're backing a founder who has that competitive energy and high urgency and aggressiveness and ambition that will let them navigate a very competitive ecosystem and emerge the victor. It's going to be a very competitive next few years. How do you feel about adjusting your mental model of what you expect from a company at a certain stage? Because if we look at benchmark, traditional series a traditionally, which is obviously where benchmark is at home, it's like 20 on 170, just kind of bastardizing, but kind of average. And the company has a certain set of foundations or metrics.

Harry Stebbings
It has something, it's a series a. Now, so many companies have nothing but great teams in AI, and it's 20 on 100. What we used to expect is now different. How do you think about changing your mental model of investing for a world of AI? It is very rational in a way, which is, is the opportunity size bigger?

Sarah Tavel
So let's go back to what we were talking about before, which is selling work. Part of the opportunity with selling work as an AI startup is that the market for that could actually be ten or 50 x bigger than if you were selling software. Why is that? You're selling a 95% productivity improvement instead of a 10% productivity improvement. So you're basically selling against the cost of the headcount as opposed to a productivity improvement for that headcount.

And by the way, it also has an easier go to market because you're not asking an employee to adopt something new, you're selling a package of work. And so when that happens, you actually open up the aperture of how big a market can be. If you're opening up that aperture, then it's actually a rational decision for the valuation or the entry price of an investment to be higher. There are plenty of companies that you could be talking about where they're not selling work and they're selling a productivity improvement, or they're selling, you know, an underlying technology that becomes a little bit more difficult for me to rationalize. Another thing that I can't get my head around is like the dilutive nature of a lot of these companies, which is just, they are cash machines.

Harry Stebbings
And I'm just worried, Sarah, that I'm going to put in whatever the check size is, 5 million, 10 million, whatever it is, and it's just going to be diluted to shit. How do you think about that? And the increased dilutive element that's inherent within what seems to be this next segment? You know, every strength has a corresponding weakness, right? So you could tell yourself a story, and it remains to be seen whether this story is true.

Sarah Tavel
Let's take the cognition round. Lately, you're raising a tremendous amount of capital for a company that I don't know if they have any customers yet, but I suspect it's very, very early. Why would you do that? Well, you have to believe as an investor, I would think that there's always a self fulfilling prophecy of giving a very talented team a lot of capital so they can then invest that capital in GPU's, train their own model, and have a competitive advantage over any other company. And so there's kind of that upfront dilution that if you accept that and believe it will be invested in a way that creates a moat for the company over time, then you're going after a tremendously big market that has a very rare moat because of the capital required to even be on the field fighting that fight.

That's the only way that I can rationalize a little bit what's happening right now. Otherwise, it just feels like there's us, VC's, we always get into this, which is the FOMO capital deployment mindset, which doesn't always lead to good things. I'm throwing the grenade in here. It feels like we haven't learned our lesson at all. And this is where I'm like, the ground.

We're goldfish. We're goldfish. And so do you worry that you fall like, not you, but like, because we have to be prescient not to fall into the FOMO field and remain disciplined. It's something that Benjamin did incredibly well over the last few years, actually, you guys were one of few firms which did retain discipline. How do you think about that in this generation.

What we always try to do is just remember what the end game is here, which is ultimately building a company that can become a independent, enduring company, imagining what that might look like in the future, and pulling forward that future into the present. To think about the dynamics of the company. And R does it have the type of dynamics that lead to those types of outcomes? Usually what I think about is that escaping competition idea. If you find those types of companies, something with a network effect, as an example, you should lean in hard as a founder, as an investor in that opportunity, because they're very rare, and when they work, they lead to very large outcomes.

That's very much a picking your battle type orientation. Like our way of thinking of things at benchmark is that each of us makes one or two new commitments a year. It is this kind of stars aligning sometimes feels like almost an unreasonably high bar to getting to. Yes. But then when we commit, it is like the full partnership committing behind that company.

Somebody who is only taking on one or two new investments a year doesn't have like a team to whom they're delegating, you know, any part of the job, and those are the ones where we pick our battles. Otherwise, it sometimes feels like it's more a capital deployment game, as opposed to like really focusing on the investments that you're making and how to, how to make those really big does the nature. Of network effects change in a world of AI? When we think about a world of selling the work and not the service or the tool, does the nature of network effects change? B two B software has very rarely had network effects.

What it has had instead is more economies of scale. You could think of it that way, where you build a product for a very specific use case. You execute like on the go to market to like grow that product into the hands of a lot of users, and then you are able to add more and more features over time to that product so that you are able to charge more. That gives you the advantage that as you charge more, you have positive net revenue retention, you have a go to market that can afford to scale and have better and better efficiencies. That is, to me, most of what has been the b two b kind of way of building really outstanding value.

And I think that's still the case for AI startups that are doing a B two B use case. You mentioned very kind of specific use cases there. You wrote about, hey gen, DeepL, eleven labs. I actually spoke, I spoke to all the founders before the show, I told you, I have far too much free time. And it was actually Massey at eleven labs who said, I would love to hear Sarah's take on models focus on one modality versus a model doing all modalities and how you see that playing out.

Harry Stebbings
I'd love to hear how you think about that. You know, Sam and the podcast that you guys did together. I think one of the things that Brad said Sam was so good at was almost keeping the main thing the main thing right, like knowing the thing to get really right. And it's very clear that for OpenAI, that is the progression of GPT for them from three to four to five and beyond. And that means that the other types of models, you know, you can imagine audio, the image, video, those are going to progress, but they're not going to progress with the same level of focus and ambition as the core foundation model that OpenAI is working on.

Sarah Tavel
They might progress as beneficiaries of that core work, but it doesn't have the same level of focus as somebody like Mati and his team at eleven labs that's focused very specifically on a very specific use case. When we think about kind of attaining product parity, people always think that, oh, actually, with that focus you're going to be so far ahead. I worry that actually it takes incumbents less time to reach product parity with startups than we think will give credit. Do you think that's right or do you think actually with the focus that they have, they do present such a head start? Well, this is back to kind of that thing I said before of like what percentage of value comes from the foundation model?

And I think, you know, we could talk about DeepL. So DeepL, again, it's just a tremendous company. So much of what they've built is the foundation model, their own model around language. But they've also built a tremendous amount of workflow to integrate for their customers, to enable a local kind of vocabulary list to be part of whatever workflow or product that someone's creating and making sure that it's a seamless experience. So even though it started maybe where all it was was actually Deepell.com, where you're going and you're just like Google Translate, copying and pasting copy from one language to another.

They have gradually built more and more value on top of that model, so that something coming out of an OpenAI, they're just not going to build that same level of workflow, the same level of integration. And so there's plenty of work to be done that's beyond the model itself. You mentioned that kind of them building out their own foundation model. I'm really interested. If we move from the application layer to the infrastructure layer, how do you see that?

Harry Stebbings
I asked this of Sam. So I'm just intrigued to hear different data points. How do you see the end state of the model landscape? Do you think we'll see the commoditization of these models? You just see the tremendous amount of investment that has to happen right now in order to drive to progress these models, because at this point it's kind of compute constrained.

Sarah Tavel
And so that is going to be the frontier that, you know, you just see the progression where each successive model is going to be more and more expensive to train. That suggests a world where you're going to have an oligopoly. Why does it not get. Sorry, I specialize in this stupid question. Why does it not get cheaper to trade models?

Harry Stebbings
I thought the whole point was we got more efficient with time, not more expensive. The belief is that, yes, some of the underlying costs are going to go down, that the chips will get cheaper, we'll get better, the research is going to improve, but it's just more and more hungry for more compute. You can almost think of it as like a highway where you keep on adding more lanes and it just. More cars want to go through. I think we just have a situation where it is a race, and part of that race, in order to be ahead of everybody else, is going to be this very expensive process of more and more specialized chips.

Sarah Tavel
More and more investment in that, more investment on the power side, which is actually becoming a real constraint. Given how power consumptive this, you know, not just the training, but the inference itself, is going to be to train is going to just get more expensive. I mean, it's going to be a bigger and bigger lift. Each time we do the new step function, the cost to the end customer should continue to go down. And that's what we're seeing, is that it is just getting more and more competitive.

The price continues to go down, and so we're all big beneficiaries of that right now. How do you think about the open versus closed argument? Again, I just think we see so many start open, go to closed. Is that the natural evolution of the environment? How do you think about that?

You know, it's funny, this is one of those questions where every month it feels like people are saying something different. Okay. People say that each next step function in these foundation models is like a ten x cost increase. Right now to do the actual training. And what happens when you do open source, you're making that tremendous investment.

And then you have to believe that if you're open sourcing the product, you're going to earn the value for that open source. That's very TBD right now. And so what it feels like if you want a model that's on the frontier, that's going to be closed source now, as I mentioned, every month it feels different with what Meta is doing with llama, that may actually fundamentally change the game. If meta is willing to make that huge investment in the underlying training and then open source that model in a way that may seem economically not rational in the short term, but is right for them in the long term, that changes the game. But right now it feels like if you need a model that's on the frontier, you're going to be closed source.

There may be some, some use cases that people have where they don't need to be on the frontier, that what is open source is powerful enough and then the ability to do what they want with it, you know, makes up for any difference. What worries you most about the space. Sara, I think what you we talked about earlier, which is just competition, there are obvious opportunities and they're huge. And it feels like very large companies can be built over time. And at the same time, it also feels like there are more companies than I've ever seen pointed at every opportunity.

And so what tends to happen, back to this food delivery wars discussion that we had earlier, is that it ends up requiring a tremendous amount of capital because you are fighting tooth and nail for every percentage of market share, someone emerges victorious. And it may be that there's a lot of companies that end. You know, it may not be that there's not a winner take most opportunity in some of these segments, but those are the ones where they create the most value for all shareholders. And I do wonder how that ends up shaking out. You mentioned the competition.

Harry Stebbings
It's also competitive to win those deals and get in front of those founders at those rounds and beat the other ten term sheets, maybe more broadly outside of AI. How does benchmark win so effectively? Is that like a swarming of partners? How do you think about what it takes to win as a group and a partnership? You know, you would be best served asking the founders that question.

Sarah Tavel
What I think about is that we just have a fundamentally different product that we're offering. The idea of benchmark, for us to make an investment in a company and partner with that founder, is that we are not delegating any part of that core work of that partnership to an internal group of consultants. What I experienced when I was at Greylock and saw is that Greylock had, when I was there, the best internal recruiting team. And I remember one of my company, Sonder, was doing a CRO search, or head of sales search. And I was like, oh, great.

You know, I threw over the search to our head of talent, Jeff Markowitz. And what I realized is that then Francis, the CEO, is forced to play this game of telephone where he is talking to Jeff about the recruiter or, you know, some different candidates. Jeff's talking to me, I'm talking to Frances. And you realize that actually that model of partnership is more about scaling the GP than it is the founder. Like, in that case, I didn't have to have the weekly recruiting call.

I wasn't expected. I didn't think it was my job to have the weekly recruiting call on my calendar to be in sync with Francis on every CRO candidate that he was speaking to. And so it saved me time. It let me have meetings with other companies or do whatever I need to do, but it was worse for the CEO. Can I just ask, is it not just providing a better quality product?

Harry Stebbings
And I don't mean that rudely, but, like, Jeff Markowitz is obviously a specialist in recruiting, is an expert in his field. He probably provides a better quality recruiting product than you do or than I do or than any GP in the world would do. Is it not about actually just providing a better quality product? I think that it's not something that is like you think about in a vacuum. It actually is.

Sarah Tavel
How well do you know the CEO? How well do you know the execs on the team? How much do you care about getting the right person, the best person possible in that role, than just having the seat be filled? How much, like, do you know through the process so that you can really help close the best candidate? All those things, they're not possible with a specialist recruiter, even if they're the best at their job.

They just have so many other clients that they're responsible for. Their orientation isn't like an owner in the way that I feel like an owner of any of the companies I invest in, but it is just a consultant where they want to get the job done. And so it's a very, very different mindset. And then I think part of what we do and what I've realized is that I have done so many reps of this now that why does an executive recruiter become so good at what they do is because they do it a lot. And that's now what I have done.

I have helped recruit and close so many candidates on behalf of the companies that I work with, that it has become a superpower for me. And it's the same thing for all of my partners. What we aspire to is to collectively be the best recruiting firm out of any other place, because that is what we do day in and day out for the founders that we work with. What's your favorite winning story, Sarah, when you review the many deals that you've won as a team? Oh, gosh, I could give two sides of the spectrum.

I could talk about the companies where it is just very clear that there isn't competition, that there's such a strong connection with the founder, and they feel that, and they feel the strength of the relationship, and they feel the commitment that it comes with our model. Even though there is competition, you don't feel the competition. Then there are those cases, certainly, where it is that benchmark group effort. And that's part of what's unique about our model, is that we are an equal partnership. What that means is if my partner, Eric makes an investment and that investment's successful, I benefit at the same level as he does.

If I make an investment and it's successful, then my partner, chathen, as the same beneficiary of that economic reward. And so we actually really do orient then towards the team. When one person makes an investment, all of us are making an investment in that company. And in the same way, then if we find a company and we all feel like we should invest in it, it can be a group effort sometimes to make that interest felt strongly with the founder and realize that kind of collective effort that will be possible for the founder moving forward. Which company story do you most remember when you think of that team effort?

Well, I'll tell cases where we have brought the partnership meeting to the founder, doing a dinner with the founder as a partnership meeting. Then the group walks away. And this has happened to me with one of my companies. Shake hands on a round. After that moment.

Harry Stebbings
When you've made an investment and it hasn't worked out, what did you not see that you wish you had done? It's a couple things. It's often the why now that we talked about before, in the same way that you believed in authenticity, sometimes you get into those ideas and you believe there's a why now that may end up being ephemeral or not quite as acute and real, that doesn't have quite the momentum that you believe it had, and I see that scenario play out. Sami has said that you say, I'm not gonna be a founder's cheerleader. How do you think about the VC being the cheerleader?

And if that's not the case, what you should be? Yeah, you know what I always think about is, when we invest in a company, what I feel most strongly is, like, I am there to help you build the best company you possibly can build. The means to that end is helping you, as the CEO, grow to be the best version of yourself. And if you're just coming to the board meeting, being a cheerleader, saying, go, go, go, not asking critical questions, not being truth seeking, not thinking about how do we pull that future into the present of, like, well, what are the things? Not just to hit the quarter this year, but to be able to scale with velocity four quarters from now, how do we start setting our company up for that success and pulling that future into the present?

Sarah Tavel
If you're not asking those questions, and you're not, you're not asking, oh, I think I see one of the executives starting to have challenges scaling, like, how do we support her? How do we make sure that she has mentorship? And if that doesn't work, we actually find somebody new. Those are the types of questions that if you're just a cheerleader, you don't push. And each time you do push, I hope that it leads to 5% better decision here, a 5% faster decision there, 5% better candidate there.

And those small differences end up compounding. Do you feel the quality of board membership is high? Founders always bluntly berate it behind the scenes, often VC's berate it behind the scenes. Do you feel that the boards you're on are good and that board membership is good? I think this is one of those very self fulfilling prophecies, which is that for both the VC side and the founder side, I meet founders all the time who either had a great seed investor and see how great it can be when they have a great partner or in a past company, they either had a great partner or the opposite.

Those founders have the wisdom to know that having a great partner really makes a difference. And if you believe that having a great partner can make a big difference, you will have that bar high, and you will find somebody who will do the things that we just talked about. If you go into the process and you think they can't add value, it's a self fulfilling prophecy. And at the same time, like, for the work that we do at benchmark if we believe board members don't do any work, I mean, they don't make a difference in the outcome of the company. And let's just be clear, 99% of the work is with the founders and the team that they built.

But there is that small difference that does come in at really important moments and can end up compounding. If we didn't believe that, then we would change the benchmark model entirely, because our model is built not to scale. It's built to make a small number of very focused investments, very committed relationships with the founders, and then from there, have an impact on the eventual outcome, final one. And then I promise we'll do a quick fire. But one can't always win in the cases where one doesn't win.

Stabbings
Why is that? And has there been a change in how you approach the deal founders as a result of not winning a deal? What I think about is there are two broad cases when we don't win. There's a couple examples that I think about where there's actually a selection bias that happens, where what we offer is we want to partner with ambitious founders who are willing to be vulnerable, recognize the things that they don't know, and help push them to be the best versions of themselves, build the best company they can build. And there are some founders.

Sarah Tavel
I remember one company I spoke to at some point, the CEO told me, he's like, I want to partner with you, but I really think I need the platform. And that was a great selection bias decision for me, because that's just not our model. The other example of that selection bias is a founder who didn't want a board member at that point in time. That's fine. That's a great decision for that founder, and that's not what we offer.

There are certainly other cases where we lose. We're not. The valuation just gets ahead of us, the round size gets ahead of us. Maybe a founder feels like there's not quite the belief in what they do, although I find that very rare. But by and large, there's just a selection bias.

I think that happens a lot. That ends up meaning the difference between these outcomes. If you break the model, what do you break the model most often on price, board members status, what would it be? It's certainly the round. In my seven years at benchmark, I think I've seen one example where we broke the model on board, and it was for a small crypto related company.

Without question, that is our product. So it's very hard for us to break the model there. But all the time. We do play the game on the field, and if there's a founder that we want to partner with, we will figure out a way to make that work. When you've lost on price, in hindsight, has it actually turned into a good company?

You know, I can't actually think of a company where we've lost on price. I can think of situations where we haven't engaged because we knew that the situation was just going to be not really part of our model. So as an example, these large, multi hundred million dollar investments in some of these new models, or companies that require a lot of training for all those cases, it's just too early to know. Final one, how do you determine when to pay up versus not to? It comes down to, do you believe that this is a company that can escape competition?

It's a founder who's going to navigate through all the competitive dynamics to escape competition. There are dynamics in the product that they're building, whether it's a network effect or some strong mode or economies of scale that let it, again, escape competition. In those cases. Someone said this to me once, and it really hit me, if you like everything but the price, you pay the price. One person said to me the other day, a really good one, which was.

Stabbings
If you're ever happy to take less. Don'T do the deal at all. If you are going for 15 million, but the founder says, I really would need you to take twelve and a half, don't do the deal. You should not be wanting to do less, ever. Do you see what I mean?

Sarah Tavel
Yeah, I do see that. I think of it the other way, which is that if you are trying to use price to get you comfortable with a deal, you probably shouldn't do it. I remember Peter Fenton said on the show, use price as a litmus test for your own conviction. Yes. Do you guys do the same for reserves?

Stabbings
How do you think about reserves? We don't think about reserves. We're very oriented towards our initial investment, and in that moment, we are more ownership sensitive than probably most other firms. But then after we invest, we are 100% aligned with whatever objective the founder has. And so more often than not, that has meant that we invest almost nothing after our initial investment.

Sarah Tavel
Of course, we'd love to invest more after our initial investment, but I don't believe in the idea of pro rata. I have started to use a term with some of the companies that I work with of, like, earn pro rata, which is that after we invest, like, what I've seen happen is that the business model of the venture firm ends up creating a lot of challenges for a founder as they raise subsequent rounds, because they're trying to bring on a new partner. The new partner has ownership requirements in order to take a board seat. You kind of optimize for that new partner, and then you have all these other people who aren't involved with the company anymore who are demanding their pro rata. And the challenge with that is that it just ends up meaning more and more dilution, really, for the founders who can't invest in subsequent rounds.

I just think that that is not the right level of accountability. If people are creating work, then, yes, I would hope that the founder would take the dilution for that work. But more often than not, it creates conflict that's unnecessary. And it's just very different than our model, which is like, okay, now that we've invested, we are 100% on the side of your. Your side of the table, and let's make every round as successful for you as possible.

Harry Stebbings
So I'm the same, and I had a call with a founder recently, and they were saying, hey, we lost our head of sales. Numbers are not looking good. It's hard, Harry. And then I went to the board, and there are many multistage funds there, and it was a completely different view. And I called the founder up afterwards, and I said, what is going on?

And they said, I need their reserves, dude. They've got a lot coming in. I can't tell them the real story. Obviously, it creates this imperfect relationship of information flow. Yeah, I feel for that founder, because what is the foundation of the board member to founder relationship?

Sarah Tavel
It's trust. And if you don't feel like you have that person on your board who's one of your investors, who you have that trusted relationship with, and you can be vulnerable with them and use them to navigate those types of moments. That sounds extremely lonely and very difficult. But listen, I want to do a quick fire, because I could talk to you today. So we were talking about boards there.

Harry Stebbings
What's the best board you sit on, and why that one? That's a very unfair question to ask somebody who has multiple boards. What I think about is probably just the relationship I've had the longest, because it's like this cliche that if you aren't embarrassed by the CEO that you were six months ago, then you're not growing. I think the same thing as a board member, I am growing and learning how to better partner with the founders that I work with. Every time, every board meeting, every interaction and so my first investment at benchmark was this company, chain analysis.

Sarah Tavel
You know, I was the first board member for the company. We led the Series A. I think it's 2017 and it's just been such an incredible journey because it's both getting to see the founders grow, like tremendously over the arc of time. But then I also have benefited so much from as the company has scaled, seeing all the new challenges that come up and helping kind of navigate and learn from, from their growth. I just feel very grateful for that journey.

Stabbings
What's the biggest miss? And did you change anything on the back of it? Without question, ethereum. You weren't expecting that I could see. No, it wasn't at all.

Sarah Tavel
I remember I was at Greylock and the ICO had just happened, I believe, or just closed, and I was reading more about what's possible with smart contracts and it just blew my mind how the world was going to be different in the future. And I didn't know what the time Horizon was, but it was just this crazy moment of realizing the world was going to be different with this new technology that kind of blockchains itself, smart contracts. And then I didn't act on it. There are so many times when you just take something that's ubiquitous for granted and you don't act on it. When you have these moments of insight where you realize this is going to be fundamentally disruptive, you have to find a way to act on it.

Harry Stebbings
What's the most memorable first founder meeting you've had? Sarah, without saying who the founder was? There's one founder I remember meeting and I was just like, wow. I have never felt this force more strongly that this founder was going to run through whatever walls that they had to run through. They were just like so deeply and intrinsically motivated that they were going to do whatever it took to make that company successful.

Did it turn into a good company? A remarkable company? What have you changed your mind on. In the last twelve months? I'll go off piece here and say antisemitism.

Sarah Tavel
Honestly, like a year ago, I just didn't know how real and present it was. And there's so many crosswinds happening right now. There's so many. It's such a complicated topic, but to see it manifest right now metastasize has been really shocking and surprising to me. Going off piece with you on this one, it's such an anathema to me because it's like such a strange concept.

Harry Stebbings
Respectfully, do you think they've always been like anti Semites who've just been quiet and now they have the chance to be anti semitic in public? Or do you think it's like, actually people who weren't, but it's just kind. Of just join in, I'm sure. And look, just, if you're pro Palestine, it doesn't mean that you're anti semitic. But there is definitely a confluence of these two things happening, which is that there are people, and this is a lot of what people talked about during Trump's presidency, where suddenly the things that didn't feel like you could say, say, had cover, and it let the kind of the vocalization of these things happen more.

Sarah Tavel
And, of course, when some people feel safe to say something that was once regarded as not the right thing to say, then it makes it impossible for more people to say it and believe it. And so there's certainly a lot of that happening right now, but then also, like, we're all subject to osmosis, and if a lot of things get repeated, then we start to change people's belief systems. And I think that's part of what's happening right now, too. Are you worried Trump will get reelected? Yeah, I am.

I am not somebody who follows the polls very closely, but certainly what it feels like is that it's almost an inevitability. And that's a very scary thing for me because I care about our democracy. It seems to be the direction that we're going in. Penultimate one, how has being a parent changed how you think about investing and operating today? It doesn't change at all how I think about investing.

The way it changes things is just your opportunity cost. I get so much energy out of meeting with founders. I wish I could spend 10 hours a day meeting with founders, whether or not there was an investment opportunity for benchmark. But the reality for me now is that there's an opportunity cost to my time that changes when you have kids. And so while the actual partnering with founders and then the investing doesn't change, that kind of marginal opportunity cost does.

Harry Stebbings
Final one, what's the most recent publicly announced investment, and why did you say yes and get so excited? I don't remember which one is the most public, but I'll say the one that I think you and I are partnering on that isn't announced. But, man, there's sometimes, you know, there are meetings where you would feel so lucky to get to partner with a founder, and you just feel in a very deep level, I need to be in business with this person. I feel that, honestly, for all the founders that I invest in. I don't know how to partner with a founder unless you feel that, but it's very close to me right now, just given that recent investment, to feel.

That listen, I can't thank you enough. Sarah. I always love artists discussions. This one has been incredibly varying in terms of topics. Honestly, thank you so much.

Sarah Tavel
No, so good to see you. Honestly, Sarah is one of my favorite guests to have on the show. She's always such a great guest and. Brings such great energy. If you want to see the full video of the episode, you can check it out on YouTube by searching for 20 VC.

Stabbings
That's 20 VC. But before we leave you today, we're all trying to grow our businesses here. So let's be real for a second. We all know that your website shouldn't be this static asset. It should be a dynamic part of your strategy that really drives conversions.

That's marketing 101. But here's a number for you. 54% of leaders say web updates take too long. That's over half of you listening right now. And that's where Webflow comes in.

Their visual first platform allows you to build, launch and manage web experiences fast. That means you can set ambitious marketing goals and your site can rise to the challenge. Plus, Webflow allows your marketing team to scale without relying on engineering, freeing your dev team to focus on more fulfilling work. Learn where teams like Dropbox, Ideo and orange Theory trust Webflow to achieve their most ambitious goals today@webflow.com. And speaking of incredible products that allows your team to do more, we need to talk about secure frame.

Secureframe provides incredible levels of trust to your customers through automation. Secure frame empowers businesses to build trust with customers by simplifying information security and compliance. Through AI and automation, thousands of fast growing businesses, including Nasdaq, Angellist, Doodle and Coder trust Secure frame to expedite their compliance journey for global security and privacy standards such as SoC two, ISO 2701, HIPAA, GDPR and more. Backed by top tier investors and corporations such as Google, Kleiner Perkins, the company is among the Forbes list of top 100 startup employers for 2023 and business insiders list of the 34 most promising AI startups of 2023. Learn more today@secureframe.com.

Dot it really is a must. And finally, a company is nothing without its people. And that's why you need remote.com dot. Remote is the best choice for companies expanding their global footprint where they don't already have legal entities. So you can effortlessly hire, manage and pay employees from around the world, all from one easy to use self serve platform.

Plus, you can streamline global employee management and cut HR costs with Remote's free HRI s. And hey, even if you are not looking for full time employees, Remote has you covered with contractor management, ensuring compliant contracts and on time payments for global contractors. There's a reason companies like GitLab and DoorDash Trust remote to handle their employees worldwide. Go to remote.com now to get started and use the promo code 20 vc to get 20% off during your first year. Remote opportunity is wherever you are.

As always, I so appreciate all your support. And stay tuned for an incredible episode. This coming Wednesday with Tom Hume at GV. Yeah.

Harry Stebbings
Yeah.

20VC: Benchmark's Sarah Tavel on Are Foundation Models are Commoditising | Why Frontier Models Will Be Closed Source | Why the Value is in the Application Layer | The Future of AI is "Selling the Work" Not the Tools

Primary Topic

Episode Summary

Main Takeaways

Episode Chapters

1: Introduction

2: The Value of the Application Layer

3: Selling Work, Not Tools

Actionable Advice

About This Episode

People

Companies

Books

Guest Name(s):

Content Warnings:

Transcript