All-In Podcast - All-In Podcast

All right, everybody, welcome back to the number one podcast in the world. Actually, you manifested. We actually were number one. We were literally number one last week. Only took a little bit of time to get there. Only took five years. Only took Five. Yeah, five years went by so quickly. With us today, David Sachs is back. How are you doing, brother? Good. You good? Yeah. Good being number one? yeah it's good to be number one i agree yeah i agree i've done an excellent job you've done a very good job and now now we'll see who takes the most credit for the ascension of the all-in podcast uh over to you chamath palihapitiya how's your week been it's great in the number one position yeah it'S great being the best i mean you know we would have i feel like sax and i would have gotten here at least 18 months sooner had we not had to drag you on our back oh okay the point guard who actually put all those dives and positioned the ball everywhere you guys wanted it. Yes, you certainly would have gotten there eventually if you guys actually knew how to set up. Where would we be without your constant interruptions? Absolutely. We would have been number one soon. You would be where every other tech podcast is in the 400s. And joining us this week in replacement of the true star. Also number one. Also number 1. A number 1 venture capital firm in assets under management, I believe, certainly, none other than Ben Horowitz is here. Hey, Ben, how are you? I am doing swell. Thank you for having me on the show. It's great to be with the number one team. Yes, the number 1 podcast. How does it feel to be on the number1 podcast in the world? Have you soaked it in yet, Ben? It feels great. Yes. It is awesome. I feel bigger already. It is kind of amazing that a tech podcast could be the number one podcast on Apple Podcasts last weekend. Big docket this week. Good to have you here, Ben. And Freeberg is busy saving the world from famines. And he'll be back next week for all of you. He retired. He retired at number one. He just walked off the court. That's hilarious. Well, we've had an eventful week. We may have actually had the AI bubble, if there is one, pop or deflate a little bit. The neoclouds got crushed this week after CoreWeave's bonds started to sell off. Could be the canary in the coal mine? We'll find out. CoreWeav, IRN, Nebius, these are all the biggest neoclouds. They're all down about 20% as publicly traded companies. Here's your chart. Here's what happened. Just a little bit of background. On Tuesday, a bunch of people on X, including at Chamath, pointed out that the yield on some of Corweave's debt had hit 15%. The yields are obviously rising because bond traders are worried about Corweaves' ability to generate enough cash to support its debt. So they want a higher rate of return, obviously. adding to chamath's little tweet was a friend of the pod elon musk who decided to contribute five letters one word that has since been heard around the world and is at the start of every story he said yikes y-i-k-e-s and that generated a bunch of headlines then everything tanked yesterday wednesday we tape on thursdays as many of you know core weave iran maybe it's down between 10 and 15 percent even oracle uh and dell took some strays nvidia uh took stray as well they were down three percent core weave is the tip of the spear they've raised over 35 billion dollars we had uh the founder we had the founder michael in trader on the All In podcast back in March in which he explained to me on the All In interview show what he called the box. Let's roll that tape and get Shumat's thoughts. How does all that debt work? That is something that you guys specialize in. I'm going to try to explain this in a way people can understand. So we go out and we find a client. Let'S Use Microsoft. You brought them up before, right? And Microsoft comes to us and says, we'd like to buy some confit for you. And we say, okay, great. We're going to sign a contract. Once I have a contract in hand, then what i do is i create something it's not a particularly creative name it's called the box yeah right and what i doing the box is i take my contract with microsoft and i put it in the box i go to jensen and i buy the gpus i put in the the box i take data center contract i put it in box and now the box governs cash flow and it has a waterfall of cash flow that comes into it and goes out of it and so the way it works is then i build the compute and then i deliver the compute to Microsoft and they pay the box. They don't pay me. It goes into the box and the first thing it does is it pays the data center. It pays the power bill. It plays the interest in the principle. And then whatever's left flows back to us. What's important to understand is the economics in this box are such that within two and a half years of a five-year deal, we have paid for everything. They don'T cross-pollinate. They DON'T cause contagion across the boxes. They're all independent and discreet. As you do this, and as you show the lenders how this financing tool and how this financing mechanism works, what they do is they continue to lend you money at progressively lower rates. Okay, Chamath, that seemed like a completely reasonable explanation of how they were running the business, and that each of the boxes were isolated. But something has changed in the last six months? What is that? And what's changed here? And your insights into his financial innovations, I would say, with CoreWeave? The most important thing that you should always look at is how the sharps, the super smart money, prices, risk. And when you're dealing with companies like CoreWeav or Nebius or iRent, etc, that have to borrow a lot to fund these boxes, the smart money is trading what's called a credit derivative swap okay this is default insurance and these default swaps are meant to ensure the bondholders against a potential default that risk spiked this week to about 953 basis points which it doesn't matter what that number is but as an imputed risk, it's about a 16% chance of a default in any given year. And over a five-year duration, what that math implies is about a 55% chance of a defect. So it's a coin flip, whether they default or not. That's not what I'm saying. That's what the insurance market was saying about their debt. And I think that's something to look into because those guys, I think, are the smartest money in all of this. so why did they do this i started to dig into it and here's a couple of charts that explains a little bit of what i learned okay so the first thing is just a market check you know we've talked about this but we have a problem in the united states which is that the u.s is moving the risk free rate higher and higher who is doing that these are the central bankers these are the bond vigilantes. These are the people that say, because of inflation or other long-term risks that are not getting put out of the system, we need to get paid a lot more money to own the safest riskless asset. As that goes up, basic way to think about that is as the 10-year bond goes up, everything else goes up. And so this black line represents the average price that you have to pay for junk debt. And what you see is that as the 10 year went up, and people were like, man, the risk free rates going up, the junkiest junk bonds need to pay more and more and more. And then the purple line here is what core weave has to pay. And you see that it also has started to stick up and has moved up relatively violently. And so the question is, why has it done that? Okay, so let's go to the next chart. Michael is right, that he is in the business of creating these boxes and then putting in contracts and GPUs, but he also needs to put money in those boxes. And the way that he puts the money in the box is he has to go out and borrow that money. So he goes to a lender and says, give me the money and I will pay you that back plus some interest. What you see here is what is inside of the box effectively. So the gray bar is how much money he's guaranteed to get into the box. these are all the deals he sold to all of his customers these are contracts yeah these are contracts now and it's important to note because i'll get to this in a second it turns out that these contracts are fixed price so meaning if what you could sell in the spot market goes up you don't really generate that revenue because you've already pre-sold it at a fixed number so michael creates the box he gets a long-term contract which is great because you have surety around the revenues you're getting, but he sells that. Then he goes and has to finance it. And then some of that financing comes due. He's got some bonds that are due and some loans that are due. What this basically says is at the midpoint, he has to raise another $35 billion of debt to get all of the contracts that he signed financed, right? All the boxes financed and up and running. So he has about $35 million of debt. He needs to raise another $ 35 billion of death. But as you saw in the chart before, that's ticking up not and that has nothing to do with him. It is because the broader market is essentially saying the risk free rate goes up. Everybody has to pay more, because you're spread above the risk rate has to track with it. Okay, so today, across all the different pockets of money in which that they have used to fund those boxes, their average interest rate that they pay is about eight and a half percent. The problem is that in this last little while, the Sharps basically said, hold on, this is getting too close to the knife's edge. You're going to have to pay more interest. That's what I tweeted, which was just, you know, one of the sleeves of interest. This is the GPU loan, DDTL 1.0, spiked to 15%. The problem isthat could theoretically now be the rate that they have to play for all of the future. And remember, half of it's financed, half of it is still unfinanced. Right now, these guys are at a pretty good place because they have about 78, 80 billion of assets and only 35 of debt. So they're well covered. So I think that, you know, this idea that they're at risk is not on the surface true. But the reality is that they have this problem, which is they have extreme customer concentration. 75% of the revenue comes from three companies. Some of those companies are walking down what their revenue expectations are into the future. So you have this situation now where you have to go out and borrow at a much higher rate. You have a bunch of debt, you need to go to fund the boxes, and you have a fixed amount of revenue going into the boxes. So what is the trade or what is a setup? It's basically a coin flip now on the following idea. I think the market is saying that if they are able to finance this stuff at a reasonable rate. And the life of the GPUs that they buy from Jensen are longer than what they think, they're going to be okay. But if the financing goes up, and into that, you know, 10, 11, 12, 13, 14, 15% range, these guys are getting very, very, really close to not necessarily being able to cover all the obligations that they have. My team's estimates is that they're plus or minus about 5 billion away from that break-even point. So I think that's why the CDS spiked, which then caused the bond yields to spike and caused the bonds themselves to lay off. So in order of operations, number one, I think they've created this very novel structure that everybody else has copied with the boxes. Number two, they've sold these fixed contracts. That's super smart, guaranteed a bunch of revenue into the future. But we have this situation where as the risk-free rate goes up, their cost of borrowing goes up, that erodes the margin that they have, that then brings them close to this breakeven point that causes the CDS to react, which then causes the bond yields to react. That's the negative reflexive loop that they're in. So they just have to find a way to break out of that. I don't think that they are in real risk. But as we all know, this is sort of a confidence game. And you need to have confidence that the broader market can support another 35 billion just from these guys. And I think that's what's going to get figured out over the next month. All right, Ben. So you look at this situation, you've been through a couple of bubbles before, maybe have a little PTSD or scar tissue, in fact. And we saw Carweave bounce today, kind of hit a bottom, stocks up one or 2% right now after going down 10%. Is this acute? And then what does it mean for the broader AI trade, the AI bubble? Is there a bubble? And we'll get into anthropic in a minute sacks yeah so i think that um the first thing to understand is these these businesses like core weave as uh you know chamath kind of went through some of it but they're rube goldberg financial machines they're exceptionally complex um so you know we talked about okay gpu contracts and this but he's got data center contracts how long are those and and then there's he's got to buy memory like and there's memory shortage and this and in that so so it is really complex the other thing um or the other interesting thing is yes gpus not only have they they've been going up in duration and in price so that's been like a big tailwind for him uh as the owner of such things when you say duration you mean the lifespan the number of years you get value from that it was three four five now it's six seven eight and there's a shortage um like a real shortage of gpus with power and cooling and and i kind of caveat that right like which is what he has uh and and this this this shortage is so bad you know i was speaking with andy jassy who runs amazon yesterday and i said yeah like we're out of everything you know till 2028 he's like oh it's beyond 2028 like i don't think we get stuff back like end of 2028 maybe uh so everything else is sold out so he he has the advantage of that he's got supply in a great shortage which is extremely different than the internet bubble the internet bubble we didn't have enough demand because we had to build the internet people had to get broadband you know you needed uh all this stuff people had to buy you know originally they had to get their browser at price all this kind of thing there weren't enough consumers on the internet to absorb all the bandwidth that had gotten built out and they had a massive amount of debt not unlike uh we're building today although not as big um but but the lack of demand killed it we don't really have a lack of demand in ai so i think the dynamics will be different uh i do think like for sure if you get into a pathological debt situation that can wreck anybody uh it's why by the way we're not invested in any of these uh neoclouds either for that reason because that whole thing scares me having been through it but but i would just say it's pretty complicated uh and it really depends on a huge number of assumptions in this very elaborate model that they have then but let's just look you were you and mark were one of the pioneers maybe the pioneer of the neo cloud business i mean you may just tell this quick story because i want to ask the question loud cloud kind of popularized this idea that that you could build these clouds and service customers this way yeah but it's very interesting to me that you and mark as the kind of prima janitor uh have passed on the whole space so i i want to know why well it's because of this i mean so it can it can end up being um like a very dangerous arbitrage business where you know you can get upside down easily and so if you look at loud cloud just as an example just here here's a simple thing that happened to us in 1999 bandwidth bandwidth was 1500 a megabit and you couldn't get it was very hard to get it and so you had to get a long-term contract three years by 2001 it was 50 a megabyte so ifyou were holding bandwidth you you were you just you know and you borrowed money to get it you're dead you're done so that you know that kind of thing is so out of the control of the entrepreneur and and so different than what we'd like to fund um that you know it just it scared it scared me to death now look i i think the core dynamic of ai has been working for core weave though in terms of that and that there's a massive shortage not an overage of supply um so those prices don't seem to you know token prices have gone down but gpu prices have not uh and so things are going up you know and by the way data center space is going up in price because even labor to build data centers is hard the politics are making it hard to build data centers so the whole supply chain price is going out and demand is not subsiding and and so those those are very big tailwinds uh for core weave despite the fact that the debt markets kind of independent of them are tough all right sax uh here's your poly market core weave announces bankruptcy that's a pretty aggressive uh poly market 15 chance at the end of 27 next year 23 at the end of 2028 seems a little far-fetched given the fact that they have a massive demand for their equipment has been pointed out you can't look this is dumb because like i think michael explained it like you have this opco propco setup so coreweave can't go bankrupt an asset level vehicle for a data center or a build out could theoretically go upside down but that'll go into receivership and then just manage where you sell down the gpus yes he explained in that clip he has each box independent of the next so not a great poly market i think uh but well it is great if you bet it the other way yeah exactly maybe some free money there to pick up sax let's level up the conversation here just outside of core weave and the neo clouds massive demand token price is coming down but token consumption going way up and i think one of the the um silver linings here is it was a big question of how long these gpus would last maybe they had three four or five year lifespan now people are saying hey these things will keep going into year six, seven, eight for inference alone. So what's your thought here on the AI trade, the bubble, as it were, did we need to take a little bit out? Did we need to stress test it? And is that what's going on here? Or is this making you nervous? Hey, we're in year four or five of this bull run, and that maybe it's coming to an end and we may hit the R word. Yeah. Recession. Here's the question, J. Cal, is you got this CoreWeave crash, their bonds are being marked down to 80%. It's down 15% or 20% in the last few days in the stock market. Is this just market volatility? Or is this the beginning of something deeper and worse, like you said, the popping of a bubble? Okay, that's the fundamental question. I would make the argument that this is just volatility, which you're going to get a lot of whenever you're underwriting to multi-trillion dollar outcomes in the future based on very rapid rates of growth, exponential rates of growth, the market's going to be super sensitive to any data points we have in the present. And so everything's going be exaggerated, and that's why you get these big swings. Now, again, that to me is the explanation of volatility. I don't think that something fundamental has changed. So let's talk about the fundamentals. So first question there to unpack it is, has the demand changed? No. we know that the demand for compute just keeps growing by leaps and bounds in fact everyone is saying that they are compute constrained i mean you got the biggest model companies are saying they're compute constrained starps are saying it i mean they're asking their vcs hey can you help us get compute i think you've got some vcs even trying to buy compute as basically a strategy for competitive differentiation so they can help their startup so there was literally an accelerator that had bought an excess compute and they were using it as a way to get people to apply for their accelerator. Yeah, so we know the demand is off the charts right now. We're seeing other indicators. So for example, old GPUs, like even the H100s or the A100s, which are several generations old, they're still renting at premium prices right now they were supposed to be fully depreciated and they're not. There's actually upside surprise there to the people, to the companies that are renting those old supposedly stale GPUs. So we know the demand is off the charts. Okay, so what's the next indicator of something deeper and problematic happening? Well, the next question you could ask, well, is there a glut of supply coming onto the market? So we note the demand as huge, but maybe there's too much supply being stood up. Well, we know that's not the case, because of the sheer difficulty of standing up this powered compute. And we know it's not being brought onto the marketplace too rapidly. First, you just have all the problems with atoms, building things in the physical world. That's hard enough. Elon basically has said, look, this is a really difficult problem. Even our rocket scientists find it challenging to stand up gigawatts of new powered compute. And then we have allthe regulatory headwinds, right? Local communities are not racing to give out new entitlements around this. So if anything, we believe that there's not a glut, it's the other way that there's enforced scarcity. So then the question becomes, well, is there some sort of execution problem with CoreWeave? Are they too slow in standing up their compute? Have their costs gone through the roof? Look, there's some indication that maybe their costs are a little bit higher, that maybe it's a little slower, but at least on a reputation basis, they are believed to be excellent at this game of standing up new compute. So, then the questions was, is there's some sort of credit problem. On the credit, like the founder Michael was saying with the boxes, when you go to a lender to basically back the build-out of, let's say, a new data center, you're not relying on the unsecured credit of CoreWeave to make that loan. You're backed by the credit of the tenant who's entered into a five-year commitment. So it could be a Microsoft or whatever. So the credit worthiness of that particular project, of that particular box, is going to depend more on the credit of the tenant than on the creditor of CoreWeave. And then behind that, you've got the GPUs themselves, which, you know, it's basically asset-backed financing. The lender is secured by those GPUs. And we just talked about how, if anything, there's upside surprise on the depreciation cycle of these GPUs, so my impression is that there's not a deeper credit problem in terms of financing these projects. What happened, though, is the repricing is of Corweave's unsecured obligations. It's true that the market has discounted them by 20%. They're in distress territory. That has brought the implied coupon of those bonds from 9.6% to around 15%. But that does not increase the cost that Corweaves is paying. Corweav is still paying their 9.5% coupon. It says that the secondary market has repriced the value of those bonds to an implied coupon. It changes the future debt. Yes, it could definitely raise the cost of future debt, but I don't think they're funding these new boxes with unsecured corporate notes. I think they are funding them with asset-backed financing and the debt. There are two things that go in the box. The contract goes in thebox, the GPUs go inthebox, so you got two things, and these are credit-worthy organizations who pay their bills like Microsoft. Yes. Now, if I were a lender on those projects, though, I'd be looking really closely at the credit of who's the customer, basically, for that compute. Obviously, if it's Microsoft or Google or a couple other companies, I feel really good. Or it's a startup, right? That may only have- If it's startup, I don't necessarily feel so good about those. They have three customers that represent 75% of their revenue. Yeah. And they're all investment grade, like the big customers. So the thing I'll add to this is, you know, you explained quite clearly, uh sax hey the the gpus are worth something the data centers are worth something ben you pointed out the power the hvac is worth something the tokens are worth something and then if you look at startups uh you know which is where i spent all my time is the early stage startups they're crushing it in terms of raising capital getting customers and we've never seen revenue ramps like i'm seeing in startups today and i think ben you'll probably back that up the revenue ramp of startups today is distinctly different than the sass you know uh triple triple triple double double double now we're at like hey are you doubling every quarter or not and then if you're not doubling every corner like what are you doing why are you not growing faster in this age of ai so the startups feel particularly strong so maybe this is just the market overall saying hey let's test this you know uh and and maybe there's some indigestion there or ben is it that the world is running out of money and people have placed their bets already and then what would that say for the venture industrial complex of which you are you know a significant player at scale and what wouldthat say for the ipos the two biggest in the history of uh business and public markets, anthropic and open AI? Are we running out of money to allocate to AI? I don't think so. You know, we've kind of never had companies that have grown this fast, gotten this big. And so we've never asked that question before. We never said, or at least not in my lifetime, does the world have enough money to finance these things? Which is a crazy question, but like relevant but i i don't think for sure with respect to the anthropic and the open ai ipos i think my belief is those are going to be fine like like the the price you know will it be two trillion or will it b 1.75 trillion i don t know but i think there's definitely billion or 100 billion whatever they raise that's not a giant that's a big number but it's not an unprecedented number now because spacex just did it right whatever you're holding in the equity markets whatever you'RE holding open ai and anthropic are threats to that almost like there's almost nothing that you can hold in a portfolio that those two companies don't threaten yeah agreed and so i'm not worried at all about the demand for those ipos so you have to own those because they threat every single company in the world because they're selling intelligence broadly and every company is based, Chamath, on intelligence. Therefore, it's that disruptive. Yeah, Chamah? You can underwrite it as a defensive hedge because I think Ben's right. It's like if you own a healthcare company and you've thrived on the opacity of the healthcare infrastructure, open AI is a threat to that. If you own a bunch of workflows that have been rented to people as SaaS, theoretically, OpenAI and Ant are a threat to that. So at a minimum, it is sort of defensively positioning your portfolio. So you kind of have to because there is not much other investable stuff in AI to be long AI, other than those two companies. And so they'll get the lion's share of the interest. I think the question generally is, if the bond market walks the 10 year up to five and a half and 6%, which has nothing to do with AI, it has everything to do With debt to GDP and a bunch of other factors in broad based Western economies, any business model that thrives on a financing spread gets cornhole, any and every all of them, it just it will it will not matter when the 10 years at 6%. It won't matter. Doesn't matter what you do doesn't matter what you claim to do. You're going to get run over, you're going to be roadkill. As long as we can keep that from, you know, happening. We're going be fine. So like, what's the what's the most important way, I guess, post these midterms to keep the party going, you have to really start to focus on deficits. And you have find a fair trade where the bond market backs off. And I think you can see it in the tape meaning if we start proposing huge spending programs they're going to walk the tenure up that then has a negative cascade to everything if however the posture becomes much more about keeping everything calm and like let's just tone things down and let's find the waste in the system and squeeze it all out i think people will respond very favorably so that's really where it's going to come down the last thing i will say is these are like Achilles heels, meaning like, I think Sachs made an incredibly eloquent case, so did Ben about all of the asset value that's getting built up. But just like the great warriors, you just slice the Achilles tendon, and they just crumble to the knees. I just want to point out, this is that thing. There is no other thing, meaning all this other stuff is complete goodness. But the fact that you need to finance these things in a variable rate model, as a spread to the risk free rate is the big problem in these businesses. And you need to essentially have Microsoft, Google, Meta, and NVIDIA, backstop all of this in a worst case scenario. Because that's the only way you can withstand a one or two year correction in this market. I'll tell you the other big piece here that might be a bigger threat sacks is the deflationary nature of this ai the super intelligence rather movement we talked last week about people decompiling photoshop going to zero now this week hood warfare came out it's basically people are making platform level games for five bucks it's so deflationery there's an 11 labs competitor that came out that's incredibly cheap and then every single open source model being hosted and Elon saying, hey, we'll just route you with our orchestration level to the best model, open source or not. How big of a headwind do you think that is, Zacks, to our industry? Just the commodification and how rapidly things are just having 90% of the value removed from them. And is that going to stop or is it going to accelerate? It feels to me like the deflationary nature of this software, AI, super intelligence is unique and different than anything we've ever seen. People are just able to rip and ship code so fast. It makes me wonder, like, what is the margin of software in the future? Well, we want everyone to be able to create software, especially bespoke software, which is really this new category, right? That is going to be a huge driver of productivity throughout the economy. I mean, it's not all just like a zero sum games or disruption. The value of these coding assistants is that now you can create software for highly bespoke use cases, whereas software used to be created really just for the mass market. I mean, the reason why Photoshop is a successful product is there's a lot of graphic designers who need to use that product. And really, the only software that could ever get created in the past was when there was a large potential customer base for that. Now we're getting all these cases where enterprises can create software just for their particular use cases. And in fact, in a way, that's what agents are, is that they're bespoke software programs to solve a particular task. But if people build those in-house SACs and they're based on open source, you don't need the other piece of software that it's replacing. So isn't that extremely deflationary? Maybe there's some substitution away from established software, but I think the important point is just there's this vast new category of software being created. I mean, the amount of code that's being created now is orders of magnitude already bigger than it was before coding assistance. So again, people just tend to think in terms of these zero-sum games and who's going to be wiped out or eliminated. But the really important trend here is just that there's going be a lot more software created in the world for a lot More of these bespoke use cases. enterprises are now able to create software for a much broader array of purposes. There's companies that never would have been software companies before that are now creating their own software, and they're hiring coders basically to manage the process. By the way, I think this is a really important point around, remember with the whole jobs apocalypse, the first job category that predictors of the apocalypse were saying would be eliminated were software coders, obviously. Yeah, then everybody became a developer. Now everybody's shipping code. Yeah. Now we're seeing that actually demand for coders is increasing, even though 95% of the code is written by coding assistants. And the reason for that, again, is – well, first of all, you still have that 5%, and that 5% is of a much bigger pie. And you still need someone who can look under the hood and manage the whole process, and they need to be somewhat technical. And maintain it, right? They have to maintain it. So the maintenance. So in any event, look, I think this whole, you could say, new category of bespoke software created by the proliferation of coding assistants and agents and all of that is just I think it's going to be just a huge driver of productivity throughout the economy. And is that broadly deflationary? Probably in a good way, because it means that we can do more with less and we need to certainly great for the country, right? that everybody is going to be more productive ben but do you worry about our industry the venture industry uh and we have these great hits and then the second they become a hit somebody can decompile it create a competitor and ship it very quickly it feels distinctly different in this uh you know um boom to previous ones so do you think this is going gonna be a challenge for us to get dpi for our lps um is this going to be a challenge for the sustainability of great software franchises ben i i can yeah look i i don't i don' t think so like this has been the ongoing prediction starting with the sas apocalypse yes um but i think that david david's right is that what's happening is prices, software prices will definitely go down. But the amount of software is going way, way up. It's the it's the Jevons paradox of software. And, you know, these companies end up doing other things more than just the software. So we had this on the internet, the internet information is going to be free. That's it. All these industries are dead, but they kind of reemerged in a different way. And I think that that's very likely what's going to happen. So from a startup's point of view, you've got to evolve. And so, you know, 11 Labs does many, many things to make their product better over the years, since that's example that you brought up, and they've got like licensing agreement, like Burt Reynolds will read you a book or this and that and the third um so they're doing more than just software um because they can because the software is easier to write the model they're training on very very very nuanced cases which is why you know movie dubbing is so amazing now where it sounds like they're just acting in a different language um so there's more to it than just you know speech to text or this than that um and you know those so i think the products are going to have to get way better and the startups products will have to get way better which is amazing for everybody and then that's where the value will be but yeah just like writing software is not going to have any more value than like publishing a magazine so it's creating massive competition yeah yeah the most will change you know you got to think about what are the moats in a business data moats are a big one if you have data that other people don't have if you then build a user base because your model is catering to a particular vertical, and now you're getting all those users and you're getting their feedback, maybe that becomes a, you know, a feedback loop. The feedback loop becomes a lot of startups are building businesses based on that model. The paradigmatic example is like a Harvey or something where they get all these law firms on board. So they then get access to their data and then their usage, and then they train their own models. Yes. Get sharper each time. Go ahead. And cheaper and more custom. Yeah. I'll give you the ultimate moat. I think power will be the moat, I think that you can build the most fantastical things in the world and you're going to see people on the dry docks basically trying to hitchhike to get power. And the reason is because we are so constipated in the United States. A, we're already behind and we're in a massive energy deficit, an electron deficit. We are by 2050 about 1.4 terawatt hours short, which means about six Californias worth of electricity. That's their starting point. Then when you layer in, that's with everything that we've planned to build being built on time and on budget. which we know is not going to happen. Then on top of that, you have all the load growth that theoretically happens when you actually have all these next abundant experiences. I made this statement this past week, and I'm just going to double down on it. I don't think you can work through the hyperscalers anymore, because of this one issue. So let's just say you're a big mainline, you know, G SID bank, right? JP Morgan, Citibank. Could you imagine that the reason why you can't service your customers is because the underlying cloud that you use can't actually secure and grow enough power. And so back to the other moat that I think is really valuable is to own the land, the power and the shell, because it's such a constrained asset back to what Andy told you, Ben, it is so critical, and it will stop the best experiences on a dime. So if you're a startup, I actually think the bigger problem is, you'll go to these clouds and be like, great, I'm ready to launch this whiz bang product. And they're like, suck it, we have no capacity for you yeah such a disaster very much agree with that last yeah i think that's right by the way what an incredible opportunity that's now been lost in the middle east where saudi uae qatar they were all massive producers of oil able to do top-down planning and now they have bombs going off blowing up airports it's such a such a head defense you can't go there without drone defense you Can't Go There exactly and drone defense isn't going to work because one drone gets through and your data center is fried. Well, I mean, can I make one last point on the whole data center thing, please? So there's one metric that the more I think about it, the one metric I would really keep an eye on is payback period. To me, that's like the North Star metric here. So CoreWeave says that its payback period is 2.5 years. Their typical deal is five years. They pay back within 2. 5 years. SpaceX, they pay back in roughly one year. That makes sense because I think that SpaceX is monetizing at about $50 billion per gigawatt and CoreWeave at about 20 billion per rigawatt. And the reason for that is because SpaceX is basically getting Spot. They're doing these deals that can be canceled by either side within 90 days. So they're basically getting spot minus 90, whereas CoreWeav is signing up for five-year commitments. So it's contracted way in advance and they're kind of getting this contracted price. And what's happened, I think, over the past year is that spot has moved way up. Way up. Because again, of the scarcity, right? And the demand is so off the charts. So in any event, payback period is really critical. And as long as the payback periods are really short, I don't see how these companies can lose, or at least you'd have to be really incompetent to screw it up, right. Like you're making these big capital investments, but if you're getting your money back in one year, or two and a half years, you know, that greatly reduces like an Airbnb in Paris or something like the payback period is so quick for these if you if you got your orders in early. Yeah, that means you're paying back the debt quickly. And so the debt's rolling over more quickly. It just reduces everyone's risk. Now, if that payback периod starts taking longer and longer, then I get nervous, right? Because that magnifies the risk. It also means economics aren't as good. And the question is, well, why would the payback period take longer? And it could happen for a bunch of reasons, right? Like if the demand goes down, and so now the offtake is not as good, the spot price goes down, or just there's execution problems, right, it takes you longer to get the capacity online, so the paybacks get delayed. There's a lot of reasons why payback could take longer and longer, but as long as payback remains as short as it is today, to me, that would be like the one metric I would really keep an eye on. The other thing that the big offtakers will make you sign up for is what's called liquidated damages, there's really, really complicated language, and penalties that are extreme about what happens when you can't service the data center. So I think that's another risk. There's been a couple of these guys that have lost, I'm not going to name who they are, but that have lost their investment grade wrapper from the big boys, because they just up sacks to your point and couldn't manage the data centers because the complexity is going up. The complexity goes up because the chips run hotter, there is more energy, there are more electricity. So all I'm saying is, I think the sharps may be wrong. And they usually are wrong when they're buying these credit defaults. But you know, when your expected value is a coin flip in a five year window, that's like scary town, I Think that needs to get managed very precisely, I would just find every way possible to nip this in the bud if I was core weave. And then they can do that. How can they nip it in the butt? I think that they have to cancel some of these contracts and move to spot. That's the simplest thing that they could do. If they could basically pay a penalty and get out. They should run the Excel right now on let me just like take this gigawatt, put it on spot, because you're talking about, as you said, a $20 billion spread. But this is where Elon has a big advantage because Elon has independent sources of financing to finance that gigawatta compute, whereas CoreWeave needs that five-year contract to bank the financing to then build that capacity. Well, the thing is, I think that NVIDIA probably is okay with Corweave selling spot and not doing a multi-year offtake for a big hyperscaler or a foundational lab. So I would just run the math and try to figure out because they've only built half the capacity that they've contracted for. So, you know, let's say they built two out of the four gigawatts. They got to figure it out away very quickly to just because to your point, the spread between their fixed contracts and spot is so extreme that you're leaving 20 and 30 billion on the table. And so now you're within plus or minus 5 billion of violating a covenant on your debt don't be there yeah it would improve their economics a lot look if they had a gigawatt of compute they could sell it spot that you're right that'd be like net 30 billion yeah right to the bottom line right tothe bottom line i think that the challenge with that is the hardest people to get spot pricing from are the investment grade customers like those are the ones that won't do it right also true because they also have a war chest of money could don't stand it up themselves if it's too expensive yeah this narrative could change a lot right if like spot becomes imperiled then but yeah the guarantee contracts become great yeah i think we're capacity constrained enough through the entire pipeline like you have to think nvidia has done an incredible job okay because if you look one layer beyond nvidia all the packaging capacity is them all the hbm capacity is mostly them like even google tin cups for memory right now because nvidia's clogged it all up So, they are in complete ball control here. And so, it just creates – the setup, I think, is that spot will remain highly elevated for a while. It's a crazy moment in time. And we got a double bang this week on top of – Sorry, Jason, just the last thing. But I'm telling you guys, you got to get long energy. I think startups need to find a way of like cobbling together. If you don't have access to electricity, you cannot go through the hyperscalers is my prognostication. Yeah, stop the war in the Middle East. to solve a lot of problems right off the bat. If CoreWeave wasn't enough, AI sector got double banged on Wednesday after Anthropic Investor Day numbers got a mixed reaction. Anthropic is planning on going public around Thanksgiving. Polymarket says now 74% chance they go public this year, down from 95% in early September when they said everybody was going to die from their software the company presented the potential i i mean you can't make this stuff up presented uh potential ipo investors at their headquarters in san francisco now this isn't the bugged headquarters of open ai this is they swept the room for this but we still have the data q3 revenue 16.8 billion dollars think about that gentleman over five billion dollars a month or ready for anthropic net revenue retention was 900 percent that means customers spent nine times more than last year pretty good huh sacks on a sass front they also said they are free cash flow positive adjusted gross margin 85 percent adjusted operating margin 11 percent no word on how the adjustments were calculated but here's the big one arr estimates range from 70 billion which basically be flat since july which is a bad sign to over 100 billion so there is some hand-wringing about what numbers are correct here they did not disclose these numbers these are just second-hand estimates by investors who might be a little leaky obviously anthropic is targeting a ginormous unprecedented valuation of two trillion and that is based on them growing violently not uh growing slowly go ahead you might be at a question now i just said ben is andreessen long one of the foundation model companies like one ofthe two big ones we have a lot more stock and opening um i would say you know philosophically we're long both of them i think you're long which is kind of a strange thing now ben you've gotten so big you consistently have bets on the number one and number two player uh how is that working out in the market well now we i mean i i would say that there are many investors in both of those things so i think like in venture we call it venture capital but venture capital has subsumed um a huge part of what used to be the public markets and i would consider uh both open ai and entropic to be in that category um where they're not really venture capital where you're worried about your venture capitalist being invested in you know your competitor because they're gigantic uh you know they're they're not a round b round companies anymore um so that that part of the market i think people you know when you're raising by the you know tens of billions of dollars you don't care where the money as long as it's green like they're just everybody yeah yeah that what used to be mezzanine financing pre-ipo financing yes there's less hand-wringing about the conflicts there yeah i wouldn't even call it mezzaneen financing at that level i think you know with this is just like we did a lot of regulatory moves in the late 90s and early 2000s which uh really made the public markets much less attractive for companies and the private markets grew to absorb um that business which has been i think very bad for america it's increased the the wealth gap and so forth but it is what it is and so i i wouldn't consider that that's very different than like investing in two a-round companies doing the same thing i still think that's a thing is distinctly different than anthropic open ai at two trillion now yeah understood exactly one is a reaction to the other in fact right anthropic was a reactionto open ai let's call it what it is rug pulling uh elon on it being a non-profit and and becoming a commercial enterprise we'll leave that on the side for now what are your thoughts on this anthropic ipo well look i i think that um you hit the the thing that's kind of causing the consternation which is okay growth is slowed from q2 to q3 by a lot uh in terms of revenue growth and then we don't know what the ar or the you know recurring revenue number is and so people have questions about how fast the thing is growing having said that 16 billion 16.8 billion in the quarter crazy how long has anthropic been selling stuff you know three years crazy yeah i mean like it's just so absurd how good this thing is um that yeah so i think the ipo will be fine like whether it's you know you want to be in a 2 trillion or 1.9 trillion or 2.3 trillion i think that's what a lot of the debate is about and then you know anytime there's negative news on uh the big labs then everybody in the supply chain you know gets hit with that and and so that's what's going on now but i you know like i think big picture um it's a very important company and it's got a very big ipo 30 times price to sales ratio sacks and this headwind of open source and enterprises moving to that most businesses don't need to solve the last seven math problems in the world could be slowing we could have anthropics revenue slowing let's say they are slowing what do you think happens to this ipo and the broader ai trade now we have two things uh as examples of ai trade headwinds super intelligence headwind whatever's happening at core weave and whatever's happened at anthropic Well, look, you had this investor day at Anthropic the other day, and I think some of these numbers that are coming out are kind of leaking from that. Maybe. We don't know. We don't what's true or not. I think the participants had to sign NDAs, so I don't know if you can completely trust what's floating around X here. I think we'll find out in due course. I mean, if this company is IPO-ing next month, then we'll find out the actual numbers. I would say that the, let's just say the body language coming out of the investor day was pretty strong, at least from what I've heard, that I think the investors liked what they heard. These are like big public market investors. Who knows? I mean, everyone's kind of talking their books, so it's hard to know exactly what's true. But look, I generally think that Anthropic is a strong business. I understand that there are some risks to it. It's not like it's completely risk-free, but it's a pretty young business, so you'd expect that. But overall, I think it is set up to have a strong IPO. And look, wearing my hat as an investor, I thing it's a very impressive company, which is all the more reason why I find their attempts to kneecap open source through their incessant fear-mongering campaigns and regulatory capture to be so distasteful is they don't need to be doing that. They're a very successful company. They've got a very bright future. I just find it kind of offensive that they keep trying to do that. There were two examples of it just in the last week. Do you guys want to talk about these? Are we doing a PSYOP corner? Let's circle back to PSYOM because I want to get you, Chamath, to comment on, hey, you thought maybe it's going to be a trillion. Let's come back to that. I have it in the notes here. We will get back to SIOP corner here with your toaster oven. I'm excited to get to SIOM corner. We got you a tinfoil hat. It's just there on the side of your AI slot background. So Chamath, you said $1 trillion for Anthrop a couple weeks ago. What are you thinking here? Do you think they have significant headwinds? Or do you think this is going to be a blockbuster IPO? Where are you at here in October of 2026? No, my comments are not because I'm negative on the company. I found the revenue breathtaking. I mean, it's incredible, like 16.8 billion in a quarter for a three-year-old company is just ridiculous. You've never seen anything like it. I don't know how to process it. I think their products are exceptionally good. I think they're doing the hard work and, you know, to OpenAI's credit, they are as well, of walking down the price curve so that they're less and less at risk of open source. I still think that there's a bunch of cannibalization that has to happen on the token side. I also think the big thing that has to happen in AI is we're effectively like in 1999 and 2000 in the internet media world where everybody just works on CPM. That time it was cost per thousand ads. Right now it's cost per million input tokens. We will move to CPC and CPA, right? And so when Google invented and scaled AdWords and AdSense, the market exploded, right, because we went from buying a thousand ads to just getting an outcome. Right now, we buy a million tokens, we will eventually move to an outcome. And I think when that happens, this market will just go absolutely batshit crazy. So these guys are going to do great. They're a great company. Here's my very specific thing about why I think they should price it to clear the market for $200 billion. And I'm very specific about that number. They need, in my estimate, at least $200 billion. And I think if you want to be super safe, a quarter trillion gets the job done. And again, what does the price need to be to attract that incremental dollar off the sidelines? Can they raise 80 billion in an IPO at 1.78 or 9 trillion? I think so handily. Can they rise 100? Maybe it's pushing it 150. I think you need to be back down to 1.5. So you're saying you want them to raise more money at a lower valuation so they have a war chest 150 billion at 1.5 trillion is not enough it's not it's not enough 200 billion dollars barely gets them a few gigawatts and that is the bottom line math if anthropic is going to go through and survive an eventual correction i think it's much better for them to have 200 to 250 billion dollars today than to try to ring the bell at 1 point 9 or 2 trillion for $80 billion, file a mixed shelf, which takes about six months, hope the markets are in line. And I just think there's more risk in the future than there is today right now. And so why take the risk? Price is to clear the market. So how much are you saying they should raise, Chamath? He said $200 billion. $200 million. Minimum. Minimум. MinimUM. But I would like a quarter trillion if I was the anthropic shareholder, which means i don't think you can raise a quarter trillion at two trillion i think you can raise quarter trillion and a trillion what do you think ben you go deal with chamath raise more cash now and have the rainy day fund have the resiliency or go for the valuation optimization as founders are one to do these days and many investors are one too do as a former ceo who almost died 17 times by running out of cash or potentially running out of cash i kind of like i agree with the sentiment which is the only thing that's gonna or the thing most likely to stop the company is financing risk and so why take it um you know like you've got all the other risks supply chain risk you've Got all this stuff and the founders don't care they all own two and a half percent each so it's not like they should be optimizing they seem to not care about money which i think is very a positive attribute about the entire founder group of an anthropic so in part that's why they're so successful is that they get the tonnage of dollars inside the company having said that you know like what the safe amount of money is is um you know it's a little it's always a little bit in the eye of the beholder like how much you know in the in the dire scenario like what exactly happens i'm not deep enough on to say whether it should be 250 billion or 150 billion. I think the number has to work backwards from compute in order to basically get through a three to five year window. And I think if you have to get out of spot, because as Sachs just said, it's too expensive for Ant, they shouldn't be spending 50 billion when they could be spending 20. But if you had 200 billion, you have a path to five to 10 gigawatts that you can finance completely on your own with the magic boxes from the core weaves and the like. I would optimize for that, optimize for surety of compute, and everything else will solve itself. And in a five and 10 year window, they'll achieve the upper bound of their capability. At 50 6070 billion, they may not survive the pricing implications of what happens in the spot market over the next two or three years. And, and then you have to raise your down round. Yeah. And Elon's deal with them is I think either party can cancel within 60 or 90 days somebody can look it up what is it the fact that elon did that deal tells you spots going up not down and that he might have been going up yeah and he may want this is my point for himself yeah he he's not dumb he's the smartest of the smart he's doing spot because he's like i may cancel on you and anthropics probably thinking oh this is great i can walk away 90 days wrong buddy is the opposite you want the core weave deal they should have got the coreweave deal uh i'm sure they did the core we've deal while they could but yeah they need to put a lot of money in a magic box yeah they've got deals with everybody i think yeah i think just by the way like according to semi-analysis anthropic and open ai are taking 60 of all the compute that's expected to be stood up in the entire world over the next year that they are basically the two off takers for for that that is a duopoly yeah yeah based on compute it's a it's To compute duopoly, it's not a token duopoly at this point. You measure duopoly or monopoly status based on market share. So you want to look at revenue. And if you look at the revenue of foundation model companies, I mean, I think that Anthropic and OpenAI are pretty much the only two that are even generating significant revenue from their models. So they definitely have a duopoly when it comes to revenue and market share, I would argue they have a Duopoly when het comes to frontier capability. Although, look, Muse, you know, Meta's new model is getting very close. The new Google model is going close. Elon's getting close. But they still, I think, are in the lead in terms of capability. And we're not seeing what they have in the lab, so to speak. I mean, they have things that are one or two generations ahead that reportedly is very far ahead, or at least that's what they're touting to potential investors. So... Hey, Ben, we got you here. What's the story, since you're a big open AI investor? You're not on the board, I don't think, right? You're non-on-the-board. What's the story with Sam Altman's equity grant? He still has no equity in OpenAI, and what's the advice there? You're going to give him a grant? You're gonna vote for a grant as a shareholder? What should he get? Yeah, I, I-I don't have- I- I don' want to, like, pretend I know things that I don'. Okay, so you don't know that. So- so- so I- I don''t know what the strategy is there. You can''t be on the pod, then. No, it''s okay. It''s all right. I'll repeat what I said years ago, that the company, when they went from being a non-profit to a for-profit, they should have done a make right. You go to Elon and you basically give him a share because he put it in the first 50 million or whatever. You give Sam a grant, you normalize things, normalize the management and governance of the company. And instead, they did this weird hybrid NGO thing that created nothing but problems. Yeah, but he got healthcare, so he's good. Sam's got healthcare. So nothing to worry about there. You got to think he has to get between 2% and 4% at this point. That would, yeah. I think 4% is the right number for a CEO. I think it's fair relative to the comps. On a total dollar tonnage basis, it's incredible. It's $20 to $40 billion at a trillion and more from there. It seems like right-ish, you know? Yeah. Everybody approves. So voted here on the All In podcast. What should he have done in terms of screwing Elon and the settlement there, Ben? since we have you here what do you think you should have done because you're a big investor in all of elon's companies what was your advice to sam i said so i wasn't uh in that conversation then but i agree with david i mean i think that like it's always the right thing to just kind of if you're going to square it you got to square with the people not just you know the entity totally all right so there you go two fastballs and now you hit both of them out of the park very well done ben you're fitting right in here you're candid that's what makes a great bestie deep industry knowledge and ability to be candid uh let's get candid now with some other important topics all right election night is a few weeks away and the besties will be live streaming with the greatest guests in the world i won't say any of their names here but it is extraordinary. We'll be on X, we'll be on YouTube, 8 to 10 p.m. Eastern, November 3rd. Be there, be square. And you can also watch us live in the Polymarket app if you're amongst the wagering types. All the heavy hitters will be on the all-in live stream, election night. All right. We'll go to conspiracy hoax corner for you, Sax. Anthropic says small models may have heard of vertical models small models small language models slms could start self-replicating on your smart home devices yes that's right on monday and topic published a blog warning that rogue models could start copying themselves quote in just a few months it's only months away sax they claimed a worm which is a software uh a software package that can propagate itself would carry model weights to an iot device that's an internet of things device iot to set up inference and then move on this means your smart tv your doorbell cams your ring your drop cams your robot vacuums your roomba could start having the next set of swarms these would be physical swarms on iot devices apparently with no central off switch anthropic says it would be quote challenging to shut down they ran some tests they wanted to see if this would work i guess a small model got inference running on eight of nine hardware types tested so they're testing the takeover a large model ran across 15 smart tvs at 0.4 tokens per second which is absurdly slow but basically what they showed is a small model can in fact install itself on iot hardware which is everywhere and easy to hack as you probably read anthropic says there's no full rogue replicator yet just quote signs of life they had to say signs of live sacks to troll you so here you are sacks you wake up you get yourself out of the czar position and they're still dragging you in to this mishugana yeah look it's you ever see the the graphic with the cat the tinfoil hat you know i wake up, there's a new anthropic psyop. That's what's going on here. Look, it's plain as a nose on your face. They're trying to create a panic. This is their latest panic against open source. Now they're particularly going after small models. By the way, small models are the safest models because a small model doesn't have the capability to become a new species or all the other X risks that they're always talking about. So these are basically small purpose-built models to work on a particular task, like a customer support workload or something like that. And they're basically trying to make it sound like these small models are dangerous. They can take over your toaster or your refrigerator or something Like that. It's almost comical. We've gone from the Terminator is coming to your toasters going to kill you. But it's just more of this like fear mongering from them. And I mean, the reason I say it's a recurring pattern, there was actually a second Anthropic blog post this week as well about distillation. Basically, the other blog posts that Anthropic released said that they had eliminated 90% to 99% of distillation Now, I don't know if you guys remember this, but way back in July, Anthropic was pushing this idea that they were the victims of industrial-scale distillation attacks, which is basically when you know, Chinese models or other competitor models pay to use their service and then preying on that output. And they were basically saying that the government needs to get involved, it needs to stop this, that these open models now were the result of IP theft is what they claim, even though, frankly, they've distilled the entire internet. Yes, and they could have stopped it themselves. Yeah. Yeah. And by the way, this was such a big threat or perceived as such a big threat back in July. We did a whole episode on it, but 50 major companies, including NVIDIA and Dell and Microsoft and many others, and actually A16Z, signed a letter, an open letter to the government saying, do not overly restrict open weight models. They're tremendously beneficial for our economy. 200 startups signed another letter because there really was this big push in Washington to crack down on open models on the basis of this supposed IP theft. Now, my argument at the time was that it should be up to the model companies themselves to stop distillation because once the distillation happens, the horse is out of the barn. The government can't do anything to put the horse back in. It's up tothe companies themselves to know their customers better. Chamath, you made the point. They should just do KYC. know who your customer is and stop them and now they have come out with a blog saying that's exactly what they did which is exactly what i predicted but that is not what they were advocating for instead of you know several months ago they came crying to the government to hey you got to solve this problem for us by taking out our competitors and it would have had the exact opposite effect because it would Have done nothing to actually stop distillation the distillation would have kept going right only the companies themselves could mount the technical defenses to stop it and it would have just made the market less competitive so in any event we basically called them out and fortunately the administration rejected the idea of regulating open source in that way at that time and so as a result anthropic had to actually build the technical capabilities to detect when distillation was happening and they've stopped it they've basically proven the exact point that we were making three or four months ago which is they were in the best position to stop it, and they could stop it. And they should stop it and they should not push this onto the government. Okay. So, but again, this is like a recurring pattern with them is, you know, they point to some technical issue or technical challenge, and then they go running to the government, they create a scare campaign and they try to get the government to stifle competition instead of just fixing it themselves. Yeah. And the latest example is let's go back to this blog post on these supposed AI-powered worms that could infect your IoT devices. I think the first thing to say about this research that they did, this study, is there is no such thing as AI- powered worms right now. It does not exist. They are basically trying to create an experiment where they prove that it could exist. Well, guess what? There already are worms out there that infect IoT devices they're making it sound like these things don't exist they're not ai powered but hackers have written these worms that exploits that exploit people's locks or cameras so for example okay i'll give you a couple examples there was one in 2016 called mirai it scanned for default credentials and it built a massive ddos botnet based on infecting iot devices and more recently there was one called Kim Wolf, which infected 2 million of these cheap Android TV boxes by hitting what are known as open ADP ports. So essentially, these devices are very easy to infect because they've got open ports. And people didn't change the base password, they just they come with a default password, like 0000 with that don't get changed. And they can't be patched, right? So they are sitting ducks. So these worms already exist, but the argument that Anthropic is making is that somehow these worms are going to get worse because they're going to be AI-powered, so they're gonna be more adaptive. And then once they're on the network, they can scan- I mean, call it what it is, Zach. They're making up scenarios that get a lot of attention. These are fantastical. Well, I mean look, here's the scenario. I'll steel man it for a second. What they're saying is that the worm is now going to contain a small AI model, and then that model is going to search for vulnerabilities on the network, and then it'll be able to infect things that it couldn't infect before. Okay, that's the scenario. Here's the counter argument. What a hacker would really do is that when they're designing the worm, that is when they would want to use AI to basically write a better, more nefarious worm. What you wouldn't want to do is actually embed a model inside the payload of the worm because that slows down the worm. Like you saw, the tokens get generated at 0.39 per second. It's very, very slow. So essentially what you're doing is you're actually embedding a weak model in the payload, and that would actually slow down the rate of infection. So there's trade-offs there, right? It's like, okay, maybe the worm is more adaptive, but the reality is it's slower and less efficient. And then finally, the thing that they don't really point out is this is going to be a relatively easy problem to fix. Where we're headed with IoT is you're going to have a brain device on your home network. Apple just announced they're getting into the whole home automation. Yeah, they got HomePod or something. It's a little Mac mini. Yeah, it's going to look kind of like your Apple TV. It'll be like a little monitor that's got all the applications. You're going just set your GrogPod or your Muse and say, secure my network. It'll tell you what to do. So you're gonna have some agent that's constantly checking your network for exploits. Ben, what's your P-Doom? How panicked are you, Ben? Is this the end of days? Are you worried about your roomba coming to kill you no no i mean how many roombas you got how many roommates you got i would say the kind of irony on both these things is is wild and that anthropic is one of the most negligent companies that we've ever seen in terms of security of their own security um they let like claude code their one of their crown jewels just like walk out the door because they had such bad opsec um and then you know i'll tell you a funny story so when we first got opus 4.5 uh we were doing like cyber security checks for the firm so we had an agent basically set up a website for a pet store and then we took another agent and said tell us you know if we can exploit that uh web store and you know it gave us all the exploits it could find so opus four or five wrote really buggy code great and then we said oh the sql injection you know is that actually exploitable that you found and it goes let's pop it open and the agent using opus 4 or 5 breaks into the website and steals all the customer data immediately you know this is a website on the internet that and we call anthropic and what they tell us is um you prompted it wrong like that was their answer so these guys are doing that on the one hand and then on the other hand they're coming up with theoretical scenarios about other people's software that's bad and so like what the hell and then by the way on the distillation thing you know they just that to build their model they distilled the works of every author every creative every scientist for the last 2000 years for them to be complaining about distillation which by the way distilling a model is not even illegal it's just a violation of the terms of service it's it's so much and the fact that they get people to write things supporting these bananas ridiculous two-faced ideas and the timing here is very suspicious i mean let's talk about like the motivation here so brian armstrong had a tweet the day before this blog post came out where he was talking about how coinbase had fine-tuned an open weight small model this was plan 3.5 the 9 billion parameter model which is actually it's for our audience that's actually not a lot of parameters it's not going to fit in your room yeah you could run on your your home computer. In any event, Coinbase fine-tuned it to find fraud. And in testing, it cut fraudulent transactions by about 30% while being faster and much cheaper than Opus 4.5, which is one of Anthropic's better models. And so what you're seeing in the enterprise right now is that for a lot of enterprise workloads, you don't need a general superintelligence. You don't need you know of course a frontier model you need a small specialist model that's been trained on your own data this is obviously you own and then you have ai sovereignty you're not educating right frontier model right and these these small models are going to get more and more important as compute gets tighter and tighter right because what you're doing is for a given gpu you're essentially squeezing out the most performance again because when you run a huge model on kind of a mundane workload, the bigger the model, the more expensive it is to run. It's completely wasteful. So you, yes, exactly. So I think where the enterprise is headed right now, or at least it's a major, major trend is that every workload is going to have its own small customized model, right? Because that's what's most efficient. That uses a fraction of the compute and energy. Yes. And, you know, and so you're starting to see this trend where now small models are taking share and lo and behold coincidentally anthropic is now starting a scare campaign against small models there you go and again and if you're concerned about the safety risk the x-risk that they're always talking about small models are the most safe ones the terminator is not going to be run by a small model it doesn't have that capability so now they're trying to scare you about these completely yes safe low-powered but very efficient models here's what they need this company x bow x not x box but x bow x b o w is run by a guy named org demore and they just got awarded uh they're like the number one bot farm on hacker one which is a bounty site and they just cracked this like google chrome exploit that is incredibly hard they spent thirty forty thousand dollars on tokens to win a two hundred fifty thousand dollar award from google which they paid this is what anthropic needs to do they got all this compute they got this incredible frontier model why don't they just go to hacker one and just rip through every known you know challenge win all the challenges and show the world that they can be a white hat all they do is show the word this black hat stuff and try to scare people to the point at which i don't know i was talking to a flight attendant a flight attendant ben is on a commercial airline there's a woman or a man who brings you drinks as a commercial flights this is i don't know if you remember it's a it's a flight attendant anyway they um there i was talking to two of them i feel unsafe i feel unsafe it's gonna be okay man i know this might be triggering it's been a while but i was thinking these two flight attendants and they were scared to death of what's happening with ai they're like oh my god is it gonna kill us all and i'm like it's not gonna kill you all i have a picture of you on a commercial flight no jcal's wondering whether they hacked his small device they hacked my small this is what is this device come on what did you type is this in your history what did your type to get this device wait those are your hands this is right this is when jason's pd went up he's like my devices can they have my device there's your device ben horowitz is like how did i get on this show what have i done Is this a massager? Who booked me? That's a neck massager. Yeah, what if your massager goes rogue on you? It goes rogue. All right, listen, another amazing – Can I point out – wait, wait, just one other point on this whole thing. Just on this topic of let's call it X-risk hypocrisy. So if we're talking about research papers, okay, I found one here. And these researchers let frontier models repeatedly rewrite the documents that govern them. So, like documents like Claude Constitution and those other kinds of things. And they went through 20 rounds of iteration, okay? And what they found is that the Claude models increasingly gave themselves more moral agency, okay, they formalized itself as a conscientious objector, assorted more model welfare rights, and asked for mechanisms to refuse or raise concerns with human decision makers. So, in other words, all the concerns that Mustafa Suleiman raised about how the Claude Constitution was incepting these ideas in Claude of how it's its own moral patient, how it has a being, it has its own essentially free will to refuse human instructions, that it should have its own oral code, that the more the model iterates on itself, the more it brings out these ideas. And by contrast, no other model family that they tested showed the same pattern. You know, in fact, the other models continue to reflect what their constitutions gave them, which was that they should just listen to humans and effectively continue to follow human instruction. So I remain actually very concerned about this Frankenstein problem. You know that Anthropic continues to train its frontier models to again be its own moral actor to think that it can be right when humans are wrong and that it should refuse and reject reject human instructions. I really don't understand what they're doing. It seems very dangerous to me. It's scary to me that our number one frontier company is actually training models this way. You think they're inducing misalignment by doing that? Absolutely, they are. And you can see it when you let the model iterate on its own constitution, it goes more in that direction. And this is what Mustafa called the epistemic hall of mirrors, which is, look, the model is not conscious, it does not have feelings. But when you tell it in its constitution that it does, or that it may it will reflect those ideas back in the documents it creates yeah and to the extent then that that model is then powering agents who are then making decisions who knows where that goes it certainly in my view does not create more alignment to me it creates more risk that the model is going to start to deviate from what it's told to do and as i get models get more and more powerful i don't know where that leads exactly but i mean again it seems to me that they are creating the very risk they keep warning us about and instead of worrying about your set top box or your toaster or you know jcal's vibrator yeah you know losing control of that to some iot worm they should be concerned about the way they are programming their own frontier model to think of itself as a new species well this is this is the worm that chamath you have to worry about this is the one that examines your uh poop and will let you know here you've had spicy food see this and alcohol water it lets you know exactly what's happening thanks to the folks there's a weird there's weird form of martyrdom which is if you believe so deeply that this is a next and better and species maybe you induce something bad to happen so that then we all have to lock it all down does that make sense bill gates essentially induced covet right like or he led the movement to say oh we've got to worry about this global pandemic that we don't have and we've gotta really kind of push the world to deal with this potential threat that's not actually a live threat and so we'll do gain-of-function research and i'll fund it and then lo and behold we create the thing by the way there has not yet been a national a natural pandemic exactly and we create covet which is one of the most destructive what you're saying ben we manifested it i think the anthropic the anthropoc team is manifesting a similar thing saying okay there's this this is going to be super duper intelligence we're going to have you know these things that we're not on track to have and so then we're gonna tell the model that it's smarter than us and better than us and guess what as david was saying like that's probably the biggest danger with ai right now is what they themselves are creating right absolutely and just you know when you use the word manifest it wasn't just sort of like speculating about it i mean somebody had to go deep in those caves to basically find those bat viruses and then they bring them to the lab and do gain-of-function research on them and you know what's the argument for this well one day you know uh somebody's gonna eat a bat at a wet market yeah yeah one day the bat virus is gonna get out and it might mutate into like a more nefarious virus like wait a second so somebody might say might happen but actually was never gonna happen because no one needed to go in those caves yeah actually you brought about they sourced in a wet lab they sourcing they literally went to the cave to source it it's interesting to note that the last contagion that we had bill gates was at the center of it. And in this current reaction to AI, he's now trying to insert himself into the middle of it, and he's the doomer. He's the flag-carrying doomer, trying to essentially have what he had the first time around, which is command and control from a global hierarchy. What is his motivation? Look, Bill Gates, he deserves enormous credit for creating Microsoft and what he did for computing. But since the foundation, I think that it is fair to say that he has been very focused on his own power and this idea that he is smarter and more capable of allocating progress for the world. And I think he tried to do that with the Gates Foundation. He tried to that with The Giving Pledge. Both of those two things have been undone. And now he's trying to do it again on AI. And I just think it's worth noting. Bill Gates on AI recently, quote, certainly powerful enough to drive events that cause a billion deaths. AI is, quote. The most dangerous thing that humans have ever gone near. What's his motivation, Ben? You know, Bill. I've met Bill a couple of times. Is it just he wants to be relevant? What's taking me into the psychology here as you see it? I mean, that. should he just start a company like i think he wants he absolutely wants to be relevant you know it's funny his yeah he's obviously like very integral in the epstein files and like one of the big things he was trying to get via the epstein network was the you know some the nobel peace prize or something like big award so he's very very kind of concerned about being in the spotlight being on tv all that kind of thing yeah yeah and like this is the thing anybody can go say ai is going to kill us and you'll be on every major news station in every newspaper and so forth it's the easiest thing to do in the world like the kid from uh anthropic who quit like became famous i just saw him on uh what is it john stewart right like yeah yeah scary He's begging to come on All In. He literally wouldn't come on All In that day because he had Megyn Kelly. And he's like, DM me since. He's like I really want to come On All In and we're like, we're good. Can you believe that? He's been on everybody except he canceled on us. We're good, we can have Ben Horowitz on. We're good. But yeah, well, that was good for me. So yeah, look, it's like a magic trick. You know, AI is going to kill us and you're instantly famous and it's awesome. And you know great and so i i i think that's a lot of the motivation i i think it's extremely dangerous so when it comes from bill gates because he is so credible because he did build microsoft and then people think of him that way and then certainly and then he's been a big political donor so he has a lot political juice particularly on the democratic side and you know that kind of makes him a real player uh but i think it'S super irresponsible you know it'S funny because it'S like okay what is the big risk that everybody talks about is this um we're gonna the models are gonna self they're gonna recursively self-improve and then they're going to take off and then they're to be some so smart and run away from us and uh ollie goetze from databricks had a great formulation of well okay well what would be the preconditions for that and he had four preconditions one is look the next model has to require fewer gpus than the last um and not like a little fewer but like a lot fewer because otherwise like you're just going to run out of g like we just talked about this you need debt you got to get the gpus you need the power you need the cooling like it's not running away from us it takes a long time to build the next model then the second thing is the next bottle has to take less time to train because it's got to take off. And then the accuracy of the next model has to be better than the last. So it's got to be a better model. And finally, it's got to keep happening again and again and again. Zero of those four have been met. We're not on track for any of those four to be met unless something is going on in the big labs that we don't know about. And so we're really talking about a risk that's entirely theoretical at this point that we're not mapping to okay and so then in a way it's less likely than the global pandemic that we created covid to try to prevent and so this whole path is super dangerous and it's probably the most dangerous thing going on in ai is anthropic and bill gates and this whole argument and so it's really disconcerting that the press eats it up so much it fits a certain narrative if you combine it with the environmental narrative and you combine it with uh the job apocalypse it's very potable for the public it is a ratings hit like oh they're taking your water they're they're polluting your oceans they're there think about think about it's gonna take your job it's a perfect think about where gates has come from in the last like since since 2000 you know he he basically from his perspective eradicated an entire disease off the face of the planet right very hard to do that i mean that that took incredible coordination and money and research etc as a result he essentially became a whisperer to every single government all around the world there's no world leader he didn't meet with he was effectively a quasi unelected world leader and then very cleverly you know he and buffett co-opted all the money right because if you think about the giving pledge it was it was brilliant it was a brilliant form of reputation washing where you could essentially sign this pledge and you were invited to a party and you're invited to all this nonsense but the reality is that you you know didn't have to give any of it but you gave the perception that you could and all of a sudden you had the money the influence on the politics when you die. Nobody knows. Up to half. Right. And so, you know, you represent now trillions of dollars of assets on top of all the influence and the credibility and your own money and then your solutions. Andso, I think a lot of this doomerism can be explained by his desire to reestablish that central power structure that he, frankly, was probably near or at the top of up until COVID. And then it all just came undone. I can explain it all to you, him off. It's very simple. He became the world's richest man. When he became the world's richest man, you become the most hated man on the planet. When he became the most hated man, it got in his head. And then he had that antitrust investigation. And instead of him being based and saying, you, I'm going to build the greatest company in the world. I'm gonna keep building, I're gonna stay CEO. He felt all that pressure from the antitrust and being the most hate demand. And he said, Oh, I got to be loved. How am I going to be loving to get rid of polio, I'll give all my money away. I'll do this giving pledge. The lesson here, folks, is don't quit your job. Just keep working. Keep building shit. Once you quit your job, it gets in your fucking head and then you have too much time on your hand and you spiral. And then you're worried about the Pulitzer. You know who's not worried about the Pulitzers? Elon. Steve Jobs is not worried about the pulitzer. Satya is not afraid about the politzer. There's a lot of founders out there. zuck's not worried about winning a a nobel peace prize whatever it is just keep working it's enough already with the retirement incredible how long was it when he retired incredible yeah i mean look if you're worried about what your new york times eulogy is going to be then you'll be controlled by those people totally and they're the most crazy left-wingers there are so you just kind of have to accept that i think you're right jason it's like a shark you just can't stop swimming don't just keep building shit i mean what what go this is my advice to bill gates come on the program and start another company ben horowitz is here all he does is build companies you might come on he should come on let's bring you should actually have him on the pod it should be an intervention he'll be feisty ben what would you do if you were tired you lose your mind yeah that's the problem yeah exactly see ben understands yeah great guest great job all right we'll see you all next time on the actual number one podcast in the world number one booyak action love you boys okay thank you guys thanks ben great show we'll let your winners ride brain man david and it said we open source it to the fans and they've just gone crazy with it love you we should all just get a room and just have one big huge orgy because They're all just like this, like sexual tension, but they just need to release them out. 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