AI revenue quality depends on retention and subsidy durability

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 35:35

   or inspiring, like in scaling in a way that we've never seen before in my history anyway. How do you think about the sustainability of revenue for the majority of AI companies? And how would you advise me, a friend? investor? I think the most important thing is looking at the numbers and anecdotes around retention to see the revenue of health and whether there's real value, right? If you meet an application layer company where 95% of their pilots are failing, it's probably not going to be a good investment. But if you meet a business that has extraordinary unparalleled retention numbers, and you talk to those customers, and you hear about how much they love the product, then of course, it's a really exciting opportunity. And so I think that those signs of true market fit are the most important when there's sort of a lower friction to accessing initial pilots or

2. 36:22

   contracts. The other element is margin. And the margins are pretty terrible in a lot of cases, especially when you take into account free user giveaways, which there's a lot of. Should we give a shit about margin structures given how early we are in the cycle? or yes, we should. It's always fundamental. The answer is yes. Both of those matter and it's very contextual. On one hand, I am a huge believer in capital efficiency. We have very positive growth and net margins, unlike most AI companies. But on the other hand, I also see the case that if you're able to distill models and make them an order of magnitude more efficient in 12 months, then it could make sense to run really aggressive margins on serving models.

3. 37:22

   It really comes down to the stickiness and whether those subsidies today are driving large LTVs that make sense long term. But I think the case where I would be hesitant is when there is very competitive markets with low switching costs so that people are pumping hundreds of millions in subsidies, maybe billions and subsidies. And then all of a sudden, the customers are switching over to a competitor if those subsidies dry up. Often bank are concerned that the level of capex is concerning because of the requirement on revenue generation that's required to make up that capex. Do you share that concern? Or do you think this is a super cycle? Of course, the investment is required and the revenue will show itself like Massa Sun believes it will.

4. 38:10

   I'm less concerned about the broader CapEx because I think that if you have a 10-year investment horizon, the market generally will look like it's at a discount. But I think that there are definitely cases of exuberance, right? People need to just be thoughtful about which investments are going to have those positive 10-year horizon ROIs and which don't make as much sense. What segment do you think is most overhyped, over-exuberant? Not company, just