Transcription
When it comes to investing, right? I mean, we're seeing massive amounts of money getting into the space as far as investments, the consumer talking about what, something like $1,000,000,000,000 already. I mean, what do you make of such a massive amount and I guess a lot of optimism around the space?
So we run a a large venture capital fund in Arizona back in the US. And so it's the largest funded by Arizona standards, non coastal, as we like to call it. But the euphoria that's going on in coastal B.C., especially around AI, I think Argo may be the maybe the biggest bubble that we've ever seen in private tech investing in kind of modern times.
So as an example, you know, OpenAI, I had to revise their cost estimates for the next four and a half years upwards by 250%. So they are rounding error, so to speak, of only $80 billion. And it just seems insane to me because if this had been a publicly traded company, the stock would have sold off by 90%. But instead they're just it is breathless storytelling narratives around how all the trees are growing to the sky. And I think when the dust settles, whenever this bubble pops, there's going to be tens, if not hundreds of billions of dollars that will literally be incinerated.
Can you draw a comparison to the dot com era when that bubble popped? Some, we were doing PayPal many years ago. You know, the search engines were finally kind of coming into existence. So Yahoo was kind of the the incumbents. And then a little company called Google came in to challenge that incumbency. And there are other search engines like AltaVista and Lycos and other companies I probably don't remember, but most people will not remember Lycos and AltaVista because they went bust. And so one of the questions to potentially ask yourself is what will be the Lycos and AltaVista equivalents for today's AI breathless environments because there will be many. And I think there will be companies that when the dust settles, will survive and do quite well. And I'm sure OpenAI will has a good chance of being one of those companies and many other prominent companies as well. But at the same time, there will be many, many other companies that will just not survive. And those companies once generate billions and billions of dollars of capital of LP's capital in the various venture funds that invested in these companies. And that shakeout will be massive.
And when might that happen? So I don't think anyone has a crystal ball, but let's say arbitrarily, it's five years out because that's when OpenAI had to revise their cost estimates between now and the end of this decade. So if we use that as an arbitrary line in the sand and maybe that's a good time measurement because I think right now AI companies are great for all of us as consumers of their products because it's very deflationary. Is these products are very efficient. So we all get to use them whether we're consumers playing with cheap tea or as a venture capitalist, these companies are creating ingredients that we all get to use and kind of the menus of the companies that we create. So we're getting these ingredients pennies on the dollar of what they actually cost. So it's kind of like, you know, five years ago during the last market cycle top when every company seemed to be the Uber for for this out of the other extreme get a shirt dry cleaned for $0.10 when in reality it probably cost $10. So why cost $0.10? Use the service. But at some point it's going to have to be priced at cost and probably with some margins. And while that time isn't here yet, it will be here soon enough.
Do you need to draw the distinction between AI places and the US and AI places in China, for instance, when you take a look at the valuations extended on the one hand, still pretty cheap. On the other they say, Sure. And as an American investor, it's much more difficult to invest in China. That's just the unfortunate geopolitical reality today. So I think if you did have the ability to invest in AI in China, there are probably some very good opportunities, especially on a relative basis, relatively cheap. By his OpenAI worth $500 billion? Sitting here today, I have absolutely no idea. How would you underwrite that? That would seem to involve a lot of assumptions, and especially especially if cost estimates are being revised up to 50% over the next four and a half years. It would seem to be even harder, I guess, when it comes to the AI space in the chip race. We have to draw the trade war into this conversation. Geopolitics always in play and tech companies get drawn into the crosshairs of tensions between the two sides. How do you take that into consideration? How is that shaping your investments in tech?
So I think it's a tale of two halves, so to speak. So on the one hand, we have these national champion technology companies, the United States, and in some respects, because they're competing globally, we want to do everything in our power to enable them to compete the best they can in a global environment. On the other hand, there are arguments that can be made that certain companies like Google and so forth might have antitrust scrutiny. That is that has merit. And so how do you balance those two considerations? And it's a very tricky question because I know today we want to be competitive on a global basis, but at the same time, we don't want these these tech behemoths, the United States, to be suppressing compact competition for up and coming technology companies that are coming out of Silicon Valley. So how do you strike that balance? And it's a very hard question.
One company, of course, that has been caught in the crosshairs is TikTok. Take a listen to what Trump had to say about the company. It's important and it can maybe even bring us closer to China. We had a very good meeting with China, and I was surprised I didn't expect it to that extent. And I'm going to speak again with President Xi on Friday. And, you know, I think I think that'll confirm things up. Of course, Trump suggesting perhaps we could see a breakthrough after years and years of of this long lasting saga.
What's your take on how the TikTok case is getting handled? So it's a very tricky topic. I think TikTok has so much cultural relevancy in the United States that there has to be a way to land the plane. And so I think what President Trump is talking about is such a scenario. Now, the intimate details of that I'm not privy to. But I don't think you can go a route where you just cut off TikTok in the United States. There would be quite the uproar, especially amongst our younger friends. So it sounds like he's figured out a strategy for that. And I think that's the right thing to do. Ultimately, TikTok won't be the first and the last company to be caught in such a scenario.
What assumptions are you making? How might this play out in the tech space? Well, again, just given the geopolitical tension between the United States and China. And so TikTok is the best example of this that is straddling both of these worlds. But there are other companies that can also be in the space. And so it's hard. So, you know, I think TikTok, though, is unique because of the cultural relevancy that has in the United States. So it's kind of the bellwether example that I think will set a precedent. And then once that precedent set, then we could look at that in terms of how these other companies may play out going forward.
How are you looking to deploy in Asia? So, again, as an American investor, it's hard to invest in China, but then there's India. There are other countries which you can. Thailand, Indonesia. It's hard because, you know, you there's only so much time in the day. And so it's great to be here. This is a fantastic event here at Super Return. It's it's a great event, especially in the sense that you get to see so many people in one fell swoop. So it's very efficient in that regard. And I just arrived last night, so I'm still kind of coming up to speed in terms of what are kind of the latest trends are. But it's great about it. I'm very, very curious about what the opportunities are. That being said, I'm big believer that one does not parachute in and expect to be the smartest person in the room. There are local people that do this 24/7. So talking to these people and getting a sense of what's actually going on is usually the best place to start.
But which are the most investable opportunities in terms of space? Is it infrastructure? Is it healthcare? What is it that's exciting you right now? So I think taking a kind of a picks and shovels approach, especially with with respect to the topic, is probably the right way. Going back to what we spoke about a minute ago, pure play AI is very expensive, at least back in the United States. So there's such a parachute in and think you're going to pick off a good deal at a good price is probably not realistic. So trying to figure out who are the groups that are actually providing those picks and shovels to these companies is probably a better entry point.
You know, you've been pretty excited about Hong Kong. You talked about the frenetic energy and you said that not too long ago. And you said for a 25-year-old Jack Selby, Hong Kong would be the place of choice. Is Hong Kong still the place of choice for Jack Selby, who's 51? Well, I think Singapore is obviously a fantastic place and you cannot save yourself by saying that. When we were doing PayPal, Singapore was our international hub. So we had essentially Singapore Inc, all of the backers were supporters of the company. So this this place has a very near and dear place in my heart and it always will. The 25-year-old version of myself, though Hong Kong is also a very exciting place. It has this frenetic energy. It has the amazing skyline and the bay and the backdrop of the mountains. And it's on the cusp of the largest market in the world. And that market in China is just getting going. If it's a U.S. baseball analogy, I don't know. It's probably the top of the second inning in terms of the amount of the game that's left to be played. So if you have the ability to invest in China and you can actually be on the mainland, Hong Kong is probably a pretty, pretty good person to have. So 51-year-old Jake Selby is still excited about Hong Kong.
What is the risk, Jack? I mean, what are the risks that you see for investing in a market like Hong Kong? So Hong Kong is a great place for young entrepreneurs to go, just like Shenzhen is right across the way. And so between the two, I think you can straddle both and see great opportunities and just decide, as you will. So I think it's a great position to be in. But at the same time, Singapore, I think is a much better relative launching point if you have a view that's looking at Southeast Asia. So it just depends on what you look at in terms of the opportunity.
Are there any tech trends they've been under, I guess, underestimated, under-invested that people should be paying more attention to? I think it's more about the bubble that's going on. So the air bubble is real and I don't think enough people talk about it. And if you were able to be an early investor in OpenAI, then congratulations. That's a great place to be. If you come in and invest in that OpenAI at a $500 billion valuation. I honestly don't know about that. So I think that is the more dominant topic that is going on, at least within Silicon Valley circles, that doesn't get talked about enough and how it shakes out. It's going to be fascinating because if you got in early, fantastic. If you're getting in today, I'm not sure. But I guess that's playing out in the volatility in how some stocks are trading right now.
Palantir, a case in point. What are people missing? I mean, what are they not taking into consideration? Is it being mispriced in any way? Well, I'm not an expert on Palantir, but the company certainly has done a very, very good job of catching the tailwind in its sales of the AI phenomena. And it's very well positioned to do that. Now, is it properly valued at where it's trading today? I don't know. I don't have a point of view there, but it's one of the few companies that's come about here recently that can take advantage of this phenomenon and a bona fide way. So I think that's really been beneficial to them as a company.
The thing is, this company, like a lot of the other tech companies, are also under a lot of scrutiny. How do you square that as an investor? It's tricky. There is a lot of scrutiny and there is a lot of volatility in the market. The tariff talk back in the United States, it's very hard to read those tea leaves. So I think now, since we're roughly about eight months into the new administration, I think people have a better grasp on how to interpret those tea leaves. But it's still very hard. And so if you're looking at tech, pure play investments, I don't know. I mean, again, there's a there's kind of a geopolitical divide and US companies that can be more pure play. I think they could be a good home for investment capital.
The thing is, when you take a look at companies like Palantir, I guess Wall Street finds it difficult to define what exactly the company does. Right. Whether it is an AI play, defense, tech and so on, so forth. I know that you say you're not an expert on Palantir. I'm just wondering, five years down the road, how might such a company look like? Well, with Palantir, right. What would that. Deb? When I took Palantir in the early days, people were confused and don't really understand the company. And so there was a misconception that it was more of a services based company. And clearly, the company has proved those misperceptions to be rightfully wrong. And so it is truly a technology company, a very, very powerful technology company that is leveraging arguably better than any company in the market. And its valuation reflects that. So but, you know, because Palantir also is not an overnight success story, it was started a very, very long time ago. It's been a hard road like any startup is, with ups and downs, but just desserts to the company and where it stands today. So far down the road, how might it look like you think? I don't know. That's a that's a probably above my pay grade. But certainly when you have companies that are run by world-class entrepreneurs. So Alex Karp is a world-class entrepreneur. It's kind of like when people ask, what about Elon Musk and what's going on with Tesla and so forth. The honest answer is I have absolutely no idea. But the one bit of advice I would give is that there are many companies you could short. There's a whole plethora of companies that are publicly listed that you could short. And why would you short Elon Musk, who is just a powerhouse in himself. And I would say the same thing probably applies to Alex Karp.
Hmm. And that leads us very nicely to what's hype and what's not. If you take a look at what's out there in terms of tech plays, okay, maybe you can single them out by name. But in terms of trends, what's hype? Oh, goodness. It's always hard. These crystal ball type questions. I wish I had the crystal ball. I'm not sure that we do. I think more generally speaking, though, if you look at where we are in the cycle. So we've come off of the cycle top of 2019, 2020 and at its most peak, 2021. And now that we've come down in the cycle, we're beginning to tick back up and you're seeing green shifts kind of across the board. So from a timing of the cycle perspective, this is a fantastic time to invest. Whereas if you were plowing money into the market at the top in 2021, the converse is probably true. It would probably be very, very hard to make money if you're investing in growth private tech in 2021. So right now, early stage perspective, beginning of the cycle as we begin to tick up, fantastic time. This is the time when the next PayPal or the next Google or the next Palantir gets started. So as an early stage tech investor in Arizona, this is a fantastic time.
You talked earlier about how it is difficult for an American investor to invest in this part of the world. What would it take for you to be playing more money here, investing in more companies in Asia, in Southeast Asia? Well, I think, you know, one of the questions in Southeast Asia is how many exits have there been? How many IPOs have there been? How many large-scale acquisitions have there been? And I'm not an expert on this, but since you asked. My sense is that there only have been a relative handful. And so as that number grows, that will give investors more confidence that they can deploy capital here and have a liquid outcome at some point. Because when you take money from your LPs, you're on the clock. You normally have an investment term of seven years and maybe that extends out to a decade. But if you don't see a track record of liquidity outcomes, it's very difficult to take money from your LPs and promise them that there's a realistic chance of having a liquidity outcome within a decade. So the more of these outcomes that you see, the more LP capital you can attract, then it becomes kind of a self-fulfilling story. So I think it is in the process of getting there, but it's not quite there yet.
So it is also the path of profitability, right? Yes, it's a path to profitability and it's a pattern of liquidity. And the more that you can have that liquidity as outcomes for the venture funds and for their LPs, the better that will become because it will attract more capital that then can be invested into the local companies. And again, it becomes a virtuous circle.
And in a way it is about transparency. And linked to that, we heard Trump saying just today that, you know, he's proposing that companies have report earnings twice rather than four times in a year. Your thoughts on that? Is that better or worse? I mean, the likes of Jamie Dimon and Warren Buffett have suggested the same. I think it's you can you can kind of you can split the baby, so to speak, and have both, because I think on the one hand, it's a bit of a hamster wheel and quarterly reporting. So when we were public at PayPal many years ago, you're just it's a hamster wheel. And so you're not managing the company. You're managing to next quarter's expectations. So that can be problematic, if not outright distracting. So there's a point of view that that's bad. However, the US is very, very good in terms of its regulatory regime, its legal regime and so forth. Anything that can be taken to extremes which can be bad. But it's I think the reason why it is the most trusted liquid market in the world are for these reasons. So you don't want to take the quarterly reporting, the ethos of that away entirely. But could you could you dial it back a bit? Probably. And that would be kind of the splitting of the two. So how does it work out what some might say? Yes, some that maybe that's because, again, quarterly is such a hamster wheel. But if you report on an annual basis, maybe that's a good incremental step. And then if you want to take a further step that is less frequent, then one step at a time walk before you run.
Okay. So just to wrap up, I just want to get your thoughts on what you're most excited about as an investor. What trends in particular? So I run a fund in Phoenix, Arizona, and so I'm a non-coastal investor and I get to invest in companies Series A, companies that typically the equivalent company that would be in Palo Alto or somewhere in Silicon Valley would be 70%, 70% more expensive. And that's probably largely attributable to this air bubble that's going on with our coastal friends. So I get to invest in an exceptional discount, and it's really a bet that are the world-class entrepreneurs that live in the other 47 states outside of California, Massachusetts, New York, and my bet. Yes, there is or there are, I should say. And so I get to coach these companies up after investing at an incredible discount. And then I go take these companies to my coastal friends. And if they want to pay up, then all the better.