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The Capex Conquest in the Cloud by @ttunguz
Amazon announced their earnings yesterday. Like Microsoft & Google, Amazon’s Web Service business is seeing a surge of growth, up from 13% annual to 17% annual growth (16% when excluding the leap year). Aside from the overall growth of these clouds increasing, the massive investment in CapEx data centers, power plants, and GPUs is stunning. Cloud Capex in Q1 AWS $14 billion Azure $14 billion Google Cloud $12 billion These are not one-time investments, but part of a broader trend that started to occur after the introduction of GPT 3 in mid-2020 Amazon was the first to invest significantly.
Massive Acquisitions in Software Startups by @ttunguz
What drives the acquisition market of startups? It’s the big deals. In the last decade, the total number of venture backed software M&A by count has remained relatively constant. The black line shows the linear trend across US venture backed companies with disclosed values of $50m or more. The average & median counts by year total 58 & 55 respectively. If there are any increases, they tend to be in the bigger acquisitions of $500 million or more - although the sample size there is sufficiently small to conclude the trend is significant.
When 1% Market Share Shifts Represent $5b of Market Cap by @ttunguz
If it wasn’t clear before, AI is the single biggest revenue driver in cloud. Microsoft’s Azure is winning share directly from Amazon. In Feburary, Microsoft grew 2% & Amazon lost 2%. Google is also taking share - 1% in the last year. A one percentage point share shift represents about $750 million of spend or about $5b in market cap. Quarter Microsoft Amazon Google Q4 2021 21% 33% 10% Q4 2022 23% 33% 11% Q4 2023 24% 31% 11% “We’re fundamentally a share taker there because if you look at it from our perspective, at this point, Azure has become a port of call for pretty much anybody who is doing an AI project”
Partnering with Dropzone: Automating Security Operations with AI by @ttunguz
Enterprises spend more on security but aren’t benefitting from the extra spend. Palo Alto Networks’ customers who buy security across 3 platforms spend more than 40x those that secure just one. Despite those dollars… “Adding incremental point products is not necessarily driving a better security outcome for them.” - Nikesh Arora, CEO of Palo Alto Networks The average enterprise uses upwards of 70 security products. Many of these products produce alerts identifying phishing emails or network access issues or odd device behavior.
A Shift in LLM Marketing : The Rise of the B2B Model by @ttunguz
Snowflake announced Artic, their open 17b model. The LLM perfomance chart is replete with new offerings in just a few weeks. Overall knowledge performance is asymptoting as expected. It’s hard to discern the most recent dots. One thing stands out from the announcement - the positioning of the model. “The Best LLM for Enterprise AI” Snowflake focuses on the model’s enterprise performance : SQL generation, code completion, & logic. This push will be echoed by others as models start to specialize.
Modern Data Architectures : Jordan Tigani of MotherDuck on Office Hours by @ttunguz
On Friday May 3rd at 9:30 Pacific time, Office Hours will host Jordan Tigani, CEO of MotherDuck. Jordan’s path through data starts with being the founding tech lead on Google Big Query to SingleStore’s Chief Product Officer to MotherDuck’s CEO. He wrote the Big Data is Dead, explaining that a power law applies to most companies’ data. One of the most innovative things about DuckDB & MotherDuck is the ability to start querying with local data & then use the cloud when necessary.
Are Software Companies Good Businesses? by @ttunguz
In “Do software companies actually have good margins?”, Benn Stancil makes a case for a counterintuitive point : Software companies are much less profitable than they might seem. Why? Because the research & development costs associated with software should be part of their cost of goods sold. Software companies don’t invest once in R&D & then sell copies of the software as we did in the 90s on CDs. It’s software-as-a-service.
The Most Profitable Software Company in Q1 2024 by @ttunguz
Ethereum generated $370m in profit on $825m in revenue for about a 45% net income margin. The chart above shows both the historical performance & also explains how web3 blockchains like Ethereum generate revenue & profits. How does Ethereum compare to other software companies? If Ethereum were to trade on the New York Stock Exchange or the NASDAQ, it would top the net income margin (%) charts, with Microsoft, Adobe and Veeva thereafter.
The Market Size Mistake by @ttunguz
Over the weekend, Tobi, the founder and CEO of Shopify, discussed the major reason investors passed on Shopify in the early days : market size. Good supercut about why Shopify worked https://t.co/pw92KutpEn — tobi lutke (@tobi) April 14, 2024 I remember that financing round, & I remember having the same concern, & making the same mistake. Living in the valley & driving on 101, the billboards & logo-adorned headquarters of successful companies provide a daily infusion of all the mistakes in I’ve made in guessing how a company or a market might evolve.
My Favorite Uses of AI by @ttunguz
Recently, I was at the library & stood in front of a book that might be a good read. I fired up Gemini, asked it for a plot summary & a digest of the reviews before deciding to read it. So I started a list : what are the ways I use AI that are new in the last year? I often publish tables within these blog posts. I write posts in markdown, a language that requires making tables in a unique format that looks like this
Extreme PMF : Sustaining Success with Scale by @ttunguz
First Round’s Product Market Fit Framework adds dimension & texture to a concept we all use - Product Market Fit (PMF). PMF isn’t attained permanently, but sustained over time as companies & complexities grow. As they scale, startups move up-market, expand into new geographies, add new product lines, & develop new customer acquisition motions. These complexities are initially linear but eventually multiply. The idea is best illustrated by example. Looker is one of the companies highlighted 🤗 & a portion of their journey is detailed here :
SUI Generis : Office Hours with Evan Cheng of Mysten Labs by @ttunguz
On April 18th at 9:30am Pacific time, Office Hours will host Evan Cheng, founder & CEO of Mysten Labs, creator of SUI. Evan & the Mysten team were instrumental in the creation of Meta’s high-performance blockchain techology before leaving to start Mysten. There are few key ideas Mysten espouses about blockchains that have led to dramatic improvements in performance & usability. First, the Move language & virtual machine form the basis of the smart contract layer.
The Art of Product Management in the Fog of AI by @ttunguz
Product managers & designers working with AI face a unique challenge: designing a delightful product experience that cannot fully be predicted. Traditionally, product development followed a linear path. A PM defines the problem, a designer draws the solution, and the software teams code the product. The outcome was largely predictable, and the user experience was consistent. However, with AI, the rules have changed. Non-deterministic ML models introduce uncertainty & chaotic behavior.
Micromanaging AI by @ttunguz
Situational Management is a framework for deciding how to manage a report depending on their skill level & motivation. Where does AI fit today? The answer is easy. It’s in the micromanage category where the motivation is high but the skill is low. The computer is relentless in wanting to users’ questions or complete their code. But the skill level is relatively low - about the same as a high-school student.
This Message Will Self-Destruct in 33 Seconds by @ttunguz
The average American attention span has fallen from 150 seconds in 2004 to 75 seconds in 2012 to 47 seconds in 2023 - a 5-6% annual rate of decline. Year Avg American Attention Span (sec) CAGR 2004 150 - 2012 75 -6% 2023 47 -5% How does this compare to these blog posts? In 2013, the average reader dwelled on this site for 47 seconds. Today, it’s 33 seconds, a 3.
Rubrik S-1 - Burning the Boats in Data Security by @ttunguz
Rubrik, a Palo Alto-based data security company, filed their S-1 yesterday. At $784m in ARR, growing 47% with 130% net revenue retention across 6100 customers, the company should be one of top 10 fastest growing software companies alongside Klaviyo, ZScaler, & Crowdstrike - in ARR terms. Half of new customers are over $100,000 in size & contract values have grown 19% from $101k to $120k in a year. 41% of new bookings derives from those new customers.
AI in the Hands of Software Buyers by @ttunguz
AI will transform software sales. Most of the discourse so far has focused on how AI upends the sellers’ worldview. But the buyers’ process will also evolve. When researching software, operational buyers & procurement teams alike will use AI to research different offerings. Typing “Compare Salesforce & Hubspot for a 10 person sales team. which is better?” into Gemini produces this result & most importantly, a recommendation : For a Hubspot or a Salesforce seller, a few ramifications resound from the new reality that most buyers will consult AI before speaking to a rep.
Selling AI : Category Creation of a Different Flavor by @ttunguz
Selling software will evolve to selling agents, AI that acts on behalf of users. The efficiencies for rote work are too massive to ignore for many uses. As the technology rapidly evolves, so too will the sales strategies. Sellers & the startups they represent will need to re-imagine roles. In a sense, selling AI agents is analogous to category creation. About a decade ago, Nick Mehta & the Gainsight team created the customer success category.
To Be or Not To Be an Agent by @ttunguz
Should software assist humans or act on their behalf? In 2016, the question was easy to answer : sell Ironman not Robocop. Technology hadn’t reached the level of sophistication we have attained today where AI is 90% as capable as a high-school student, the MMLU benchmark for AI is precisely this. The next generation of software startups have a strategic question with different terminology & potentially a different conclusion. To be or not to be an agent, acting on behalf of workers?
AI SaaS Companies Will Be More Profitable by @ttunguz
Will AI sofware companies operate with better or worse profitability than a classic SaaS company? Initially, I thought worse since the expense of serving AI as a product is signficantly higher. But now I’m not so sure. AI SaaS may be much more profitable than the -10% average net income margins of the current crop of public businesses. Yes, AI inflates the cost to serve the product. Google queries may be 10x more expensive than standard search results.
Analyze All the Things : Data Omniscience with Omni by @ttunguz
Within data teams, a tension exists. Centralize the data analysis to ensure accuracy or enable end-users to analyze their own data directly which is faster & more direct. The pendulum between these two states started with centralization during the 2000s with BI products from Microstrategy, Cognos, BusinessObjects, & Hyperion. In 2004, Tableau emerged from the Stanford campus to deliver their application to the users. Cloud databases ushered in an opportunity to centralize that data analysis again.
The Vector Computer Company by @ttunguz
If you were to watch three videos on YouTube Shorts - one on Italian cooking, one on chess openings, & a third on crypto trading, YouTube Shorts’ recommendation algorithm combines the video descriptions with your dwell time. Watching the osso bucco video to its end would trigger more Italian cooking specialty videos in your feed. We believe every LLM-based application will need this capability. Combining text & structured data in an LLM workflow the right way is difficult.
Why Databases Won't Charge for Storage in the Future by @ttunguz
The database is being unbundled. Historically, a database like Snowflake sold both data storage & a query engine (& the computing power to execute the query). That’s step 1 above. But, customers are pushing for a deeper separation of compute & storage. The recent Snowflake earnings call highlighted the trend. Larger customers prefer open formats for interoperability (step 2 & 3). A lot of big customers want to have open file formats to give them the options…So data interoperability is very much a thing and our AI products can generally act on data that is sitting in cloud storage as well.
The Opposite of a Good Idea is a Good Idea by @ttunguz
For those of us who love logic, the paradoxical title of this post should catch your eye, just as it did mine. In Alchemy, the founder of a major brand agency describes the way many of the major consumer companies in the world created brands. We call it breaking out : a double entendre which means both growing faster than competitors but also in a different way than their competition.
Looking into the Future of BI With Colin Zima by @ttunguz
On March 15th at 9:30 Pacific time, Office Hours will host Colin Zima, CEO of Omni Analytics. Colin is no stranger to business intelligence & data analysis. He worked on search quality at Google, founded a dynamic pricing company for the restaurant industry, then ran data at a HotelTonight before becoming Chief Analytics Officer at Looker through its acquisition by Google. Colin has advised many of the world’s largest companies on their BI strategy.
What Happens When AI Performance Asymptotes? by @ttunguz
In the past, the bigger the AI model, the better the performance. Across OpenAI’s models for example, parameters have grown by 1000x+ & performance has nearly tripled. OpenAI Model Release Date Parameters, B MMLU GPT2 2/14/19 1.5 0.324 GPT3 6/11/20 175 0.539 GPT3.5 3/15/22 175 0.7 GPT4 3/14/23 1760 0.864 But model performance will soon asymptote - at least on this metric. This is a chart of many recent AI models’ performance according to a broadly accepted benchmark called MMLU.
What If LLMs Change the Business Model of the Internet? by @ttunguz
Last week, Reddit filed their S-1 to go public. At least 10% of their revenue - about $60m - comes from selling data to train Large Language Models. Reddit’s data sales revenue will likely be much more than 10% by the end of the year. Quoting directly : We expect our growing data advantage and intellectual property to continue to be a key element in the training of future LLMs.
The Secrets to Building Vibrant Communities in Web3 Open-Source by @ttunguz
The Community Source licenses may be the future of open source software. With closed-source software, the code isn’t shared outside the company that wrote it. Open-source code is freely available to examine & use. Open-source companies like Elastic ($13b), Confluent ($10b), MongoDB ($33b) have been phenomenally successful. Along the way, many of them have changed their licenses to shield themselves from copycats. Arbitrum, an open source project with 1m Twitter followers & worth about $20b, implemented a “Community Source” license with these key features :
The First $100m ARR AI Security Company by @ttunguz
Palo Alto Networks, the largest security software company in the world, worth roughly $82b, announced earnings this week. There are three interesting themes : AI is a big business for them already. Internally, the efficiency gains are impressive. They’ve embarked on a platform strategy 5 years ago & there are some positives but also some significant challenges. The company is buying out customer contracts for six months to win over new business.
Nobody Knows : Steel & Blockchains by @ttunguz
Asking “What problems do blockchains solve?” is like asking “What problems does steel solve over, say, wood?” Blockchain networks are a new construction material for building a better internet. This section in Read Write Own, Chris Dixon’s book, has been bouncing in my brain for the last few weeks. Very few people know whether today’s apps are built with, just as they don’t consider the construction materials of their office building.
One of the Biggest Public Offerings in 20 Years by @ttunguz
The Bitcoin exchange-traded funds (ETFs) launched on January 12, about a month ago. On the first day, investors bought $655m & nearly $2b in the first three days. Since then, the figure has swelled to $4.6b. It’s not a fair comparison but for fun, we can compare the Bitcoin interest to the largest technology IPOs for a sense of scale. Company IPO Date Raised $B Facebook May-12 $16.0 Uber May-19 $8.
Building a $20b Behemoth : Office Hours with Steven Goldfeder of Offchain Labs by @ttunguz
On February 23rd at 10am Pacific time, Office Hours will host Steven Goldfeder. Steven founded Offchain Labs, the company behind Arbitrum, a web3 project worth $21b as of this writing. Arbitrum is a L2, a layer 2, that sits atop Ethereum, improving its performance & cost to write transactions. Steven authored many of the seminal papers behind modern blockchains. More than innovating technically, Steven has guided Offchain Labs’ developer relations strategy in a unique way in the ecosystem.
The Sudden Repricing of Startups in Early 2024 by @ttunguz
We’re entering a new pricing environment for software: AI vs non-AI. It’s only happened in the last few weeks. Recent earnings have pushed some of the most important companies to all-time highs. Company Performance Confluent 34% Cloudflare 21% ServiceNow 20% Microsoft 14% This dynamic doesn’t favor everyone. Theory created a public market AI index to track software companies who have significant product plans or current AI businesses. AI companies trade at 2.
AI Design Patterns by @ttunguz
As we’ve been researching the AI landscape & how to build applications, a few design patterns are emerging for AI products. These design patterns are simple mental models. They help us understand how builders are engineering AI applications today & which components may be important in the future. The first design pattern is the AI query router. A user inputs a query, that query is sent to a router, which is a classifier that categorizes the input.
Standard Issue AI by @ttunguz
“For some companies, [AI is] going to be standard issue like a PC.” It’s not just for some. Many companies are moving in this direction. Across Microsoft products, OpenAI infrastructure, Github CoPilot (for coding), & Power Platform (for Office users) the growth is spectacular. Calendar Quarter Azure OpenAI Orgs, k CoPilot Users, m Power Platform Orgs, k 1/1/24 53 1.3 230 10/1/23 18 1 126 7/1/23 11 63 4/1/23 2.
Experience as a Status Symbol by @ttunguz
Last year, I argued every company would need an AI strategy because AI would infuse most products. But, I missed an important concept in the post. Talent. In the last year, AI experience has become a status symbol on a resume & a path to materially higher salaries. I’ve spoken to many executives seeking their next role. “I’m looking for a role in an AI company” is a refrain in every conversation.
The Fastest Growing Software Sectors in 2024 by @ttunguz
The fastest growing software category in the public markets is security. Data follows. Security companies as a group average 29% expected revenue growth in 2024, compared to 23% for Data (or DaaS which stands for data-as-a-service). Fintech & SaaS (horizontal) average ten percentage points fewer expected growth. Anticipation of this growth propels multiples. Security & data top the charts at on average 10x enterprise-value-to-forward-revenue, compared to 5x for the others.
AI Drove the Largest New Bookings of Any New Product by @ttunguz
ServiceNow, a $150b market cap company, made this statement yesterday in their earnings call : “In Q4, our gen AI products drove the largest net new ACV contribution for our first full quarter of any of our new product family releases ever, including our original Pro SKU.” That’s pretty sensational for a company with 3 massive business lines & enough acronyms to fill a dictionary : “With technology, customer and creator, we now have 3 workflow businesses over $1 billion in ACV.
5th Grade Outlining in Mrs. L's Class : Metawriting before the Age of AI by @ttunguz
When I sat down to write this post, I wrote : Write an introductory paragraph telling a story about when I was in grade school, my 5th grade teacher, Mrs. L, insisted on the class outlining their paper. Write a paragraph about how we all wish we would outline, & there are frameworks like Situation, Complication, Question, & Answer that achieve this goal. But it’s been easier to simply dive in as much for grade school as in corporate life.