The Future of SaaS Investing, Machine Learning, & Data Privacy (w/ Raoul Pal & Gordon Ritter)
RAOUL PAL: Gordon, great to have you on Real Vision. GORDON RITTER: Great to be here. Thanks, Raoul. RAOUL PAL: Your story is an incredible story, and it all leads to this moment in time which is the dominance of this SaaS business model that you were such a part of. I would love, before we talk about what is going on in the world and how you see things, to go back and tell us your journey. Because it is a fascinating journey. GORDON RITTER: Well, thanks, Raoul. A quick story
on my background is I grew up in Maine, a little town in the middle on the coast in Maine, and my family moved me up when I was young. That was my first taste of, how do you deal with something that is not what you plan, but it actually pays off. I had the chance to go to a high school that had a little program called rowing, which is crew which I was a nonathlete and picked up this sport, and it changed my life. My wife is a rower that I met after college and rowing has completely changed my life. If I had not moved to Maine and then gone to a school that had rowing, the world would certainly for me not be as beautiful a place, and still I row many days a week even now at this stage in life. Then I had the chance to get started on your side, I actually ran a division, worked as an analyst at First Boston and ran a group that started the collateralized mortgage obligation when I was at a very young age, decided I did not want to do the standard pool so I moved with a guy named Dexter [?] to invent the mortgage backed security and worked with him. We created that wonderful security that was actually wonderful in the
beginning and then 20 years later, got taken over by different forces. Early in my career, I always learned that if you just avoid the herd and try something different and new, it pays off. Then we will start making the transition to meeting an amazing gentleman called Marc Benioff, the founder of salesforce.com. I had sold my second company to IBM, and was running a division of IBM there
and Marc walked in the door looking for a launch partnership to really launch his young company called Salesforce and go up against Siebel, if you all remember Siebel System's days. By doing that, all of a sudden, the people you meet in life changes your life and I had the chance to help him in small ways get Salesforce started. He then recruited me to start a new company that was separate from Salesforce, which was the platform side of this whole SaaS and cloud revolution. It
was called Software and Service ironically. Our company was the name of this whole category. I was CEO and Marc was chairman and we, for a couple of years, built that. Then ultimately sold it back into Salesforce and it has become the Salesforce platform. RAOUL PAL: What did you see in that at the time? When he was pitching you the idea and the story, did you see that this is a huge revolution that was coming? What year was this roughly? GORDON RITTER: This was 1999, so it was at the earliest. When things were certainly still in bubble form. Then as we came
down. The key to great leaders are both visionary in what they see and they have conviction to stick with it. While the rest of the world was coming unglued, I remember when we were raising our first venture fund around with Salesforce as our anchor strategy, -- NICHOLAS CORREA: Sorry for interrupting your video, but I have a very important message to share. At Real Vision, we pride ourselves on providing the very best in-depth, expert analysis available to help you understand the complex world of finance, business, and the global economy.
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the rest of the world was coming unglued, I remember when we were raising our first venture fund around with Salesforce as our anchor strategy, we invented the SaaS investment model, which we can talk about later. I remember our investors would say, are you investing on a dotcom? Those were puppets.com days. We clearly were not. It was a very different model, but everyone looked at it and said oh, it is just another post bubble company that is going to go away. Marc had a very clear idea. I remember talking to an IBM exec while I was there, and they would stand up in front of customers and said we, you and I wasted a lot of your money over the last 15 years in client server software. That is because shelfware led the day. A lot of money was spent on the software, and it never actually was implemented. Marc saw that as a massive opportunity from within Oracle that let us create a model that more aligns with the customer and it will pay off. It is going to take a while everybody loves big, upfront software licenses,
these take time but once they get going, as we have now seen 20 years on, once they get going, they are incredibly powerful business models. RAOUL PAL: How did you survive that 2001 dark days period? GORDON RITTER: I had left IBM, first of all. My career was in cash after the IBM acquisition anyway, and then decided that with Marc, just take a risk, and let us see where this new world might go. Then once we sold it into Salesforce, I either was going to do another startup in the SaaS space because I had certainly seen it, or I was going to maybe start a venture capital firm. That is what I ended up doing with two amazing partners. We came together around, if this works as well as we think it might for Marc, why do not we be the parallel strategy within the investment side? RAOUL PAL: When you built out the fund, what did you think the opportunities were going to be? Because we always have a vision in our head, and it never normally materialized. Some of it does. Some of it is wildly wrong.
When you started, what did you think were going to be the big opportunities? GORDON RITTER: We called our first category, even though I had, with Marc, named that the company Software and Service, we thought that was too nichy, it was too small. Salesforce was a big winner. We had a couple of others intact in the accounting space, there were two or three companies in those very early days that were doing it. Most were hybrids, most were trying to be application service providers, which is just taking client server software and putting it on the web. Very few companies really were doing it. It was Salesforce and everybody else. We called the category technology-enabled services, which terrible name, but that was our broad description for these are not consultancies and they are not behind the firewall software companies. They are in this
middle ground that gave us, we thought, a big enough swath to focus but over the life of emergence, we have just tightened in on exactly what the value is. Let me come in on a point I love to make on this, we will come back later as we talk about the current opportunities. What Marc really had conviction around, not only did he have a vision for customers do not like shelfware, but he also had a really clear vision on this concept of multi tenancy, which how many of us have made a lot of money within the cloud software world, and we really do not know what multi tenancy is.
Let me just highlight that. The key insight and Marc got this 20 years ago, while the rest of us are figuring out over time, is that when software gets automatically updated across every customer, when one customer finds a bug, and/or finds a new solution, or you get new insights on how the workflow should be done better, everybody benefits. I remember when I was talking to Textron on a reference call about SuccessFactors, which we ended up investing and sold to SAP. The Textron gentlemen said, I have heard that SuccessFactors is used by GE. GE has an amazing HR
team, and they know how to really run their teams. Guess what? By using SuccessFactors, I am ultimately getting access to GE's insights. When I heard that, I am like, that is multi-tenancy. That is this little jewel of value that has been at the root, I think, most of the cloud.. Everyone else says it is easy to use, easy to adopt, all of that. No, multi-tenancy is a fundamental business
model innovation that Marc saw early. What we are going to see now is take that, that is still just for software based network effects. When we start getting to the real network effects that are coming around AI and machine learning, and the amount of value we can offer, it is going to make current cloud software look like just the tip of the iceberg in terms of what we can do in the AI space. Well, we will get to that later. RAOUL PAL: When you started Emergence, had people understood this game yet? Were you one of the first people to start to realize that this was a big opportunity, and therefore, I am guessing the valuations were not as rich? GORDON RITTER: Yes. Again, we were not only early. Again, other than Salesforce, there was almost no one doing it.
It was Marc was ahead of the curve way ahead and we were willing to bet that the market would start to come this way over time. It was we would make sure we were meeting with every single company that was even close to doing this in any other sector. As I said, ASPs, some more consultancies that said they could build software, which usually never worked. There are lots of ways. We had to
pull the market in to this category in the early days. Luckily, I love to say that I would not be here talking with you if we had had just been another new idea that just did not catch on. What I am most proud of is we focused. We stayed at it, we did not start to wander to consumer or wander off to some other area. We stayed in the lane, and it has gone very well. RAOUL PAL:
When did Marc Andreessen come out with software is eating the world? Because that was one of the moments that everybody started, and that was one of the most profound statements I have ever heard. It remains profound. It sounds like he started to figure it out at some point and made it famous as people-- GORDON RITTER: I looked at that-- it was 2010. We started Emergence in 2002. Again, did we think of it in that same way? That is a brilliant encapsulation. Yes, the key is we as a firm are a hundred percent focused in this area while there is very few venture capital firms that have not dabbled in either obviously, consumer and semiconductors and healthcare. Once you
start getting good at what you do, guess what? You typically do not stay focused. You start wanting to hedge, and what I love to say is, hedges have cost, they are not free. I know you would appreciate that. RAOUL PAL: Yes, and I am fascinated. The first few investments, what valuation metrics were you using at that stage? GORDON RITTER: Again, it is 2002, 2003, 2004. It was just coming out of the bust there. Those early days, it would be $2 million to $3 million going in at a 7 to 10 pre, especially in a category that was not seen as hot. Back then,
nothing was that hot, and certainly not SaaS software that had not even really been named yet. RAOUL PAL: Then what was the evolution? As you move through, what investments were you starting to find, uncover getting in towards 2010, when things start really changing? GORDON RITTER: The trajectory of cloud software is not dramatically different than that of software that is coming forward, a client server or even mainframe. Starts with horizontal functional areas. It is sales, it is marketing, it is GNA, or general ledger, it is HR. You have all those different sectors we call horizontal cloud. Those are the first ones to go. There are cloud equivalents in all of those companies that really happened between call it 2003 and 2010. Horizontal cloud was the game, and then overlapping with that, then it went to industry cloud, so we helped to create the whole category of cloud in total. Then within the industry segment, that is when
the classic rotation of software to then go in and build by industry and fundamentally add value. The difference in the cloud by industry focus is you can layer the cake. You can start within one area like CRM, and I will use a company called Viva Systems that you may have heard about, started in CRM, but then ultimately added content management and analytics and ran our way through the business with different value propositions for each segment. In the old software days, you could not build a 50 million or 100 million lines of code for each one of those pieces by yourself. Companies like Documentum started within one area, let us say life science and CRM, or document management and then they went horizontally. In the era of the cloud, you can vertically integrate and create incredible businesses with much higher competitive moats because you just cannot catch up once you get started, but we can talk about that as well. Then the next major
trend that I am seeing is a horizontal cloud industry cloud, and then once you have the context within a given industry, you can then add machine learning and AI to add additional value. I wrote a piece in 2010, I think, maybe not quite as well quoted as Marc Andreessen, about the Death of McKinsey, and the concept there is that if you think of what McKinsey does, and I do not actually mean that they are going away, but the value proposition they bring is to executives, they gather all this data from within your business, and then they tell you, here is which direction you should go, or here is next best action. Guess what? Software companies have that now. They have the value of what your employees are doing, what your customers are doing, and they have real understanding of how to build that software and build that analytics. With AI and machine learning, we think that is the next major trend on top that, to me, will make the-- call it if you and I who use software every day, is it maybe 5% addition to our productivity, maybe 10%? If we actually can know on the fly, almost before we ask how to conduct an interview better, how to stop and put my hands down, because that is not a good way to have an interview, the value of that software is going to be orders of magnitude higher than the software we have today. RAOUL PAL: When you look at this, I know you studied economics. The business model is super interesting because it has two massive benefits. One is price deflation.
You cannot compete, none of the existing software or architecture that was there compete against these business model. It is inherently deflationary. The other thing is the margins just were of a different order of magnitude than anybody had seen before. How did you find your-- you are thinking about the margin side? GORDON RITTER: I am thinking about the margin side, the licensed software margins were pretty sweet as well. It is just that the value that
customers were getting was not very high and they fundamentally were not happy with it, and there had to be a better solution and Marc drove a truck through that. That was what he saw. He saw that people are just sick of spending $5 million on, the margins were quite high on that software, but they were not getting value. When it comes to renewal time, or when something better shows up, he knew he could sweep the floor with them. Please keep going with your question, I agree with you on the fundamental business model as being that we are lowering costs and lowering price, which is good, and therefore more and more businesses can use it. RAOUL PAL: Cloud is the great example. It is just it is so cheap now compared to everything that was there before it. As you point out,
it is infinitely scalable, really. The marginal cost goes down and yet, the providers still have big margins because the marginal cost of them is so low. GORDON RITTER: Correct. That is what, looking at the macro picture of why this sector is doing so well in this environment with yields low, everyone is reaching for yield, you can almost look at these companies and then the fine tuning we can talk about, but you can look at these companies as they are bonds. They are bonds that
are growing very nicely, so call it 50% to 150% annually in growth and with most of them- - and this is I think the most important thing to look at, is what is their true competitive mode? If within these industries, it is incredible competitive mode. That is why I think some of these industry cloud companies are doing very well. Because once you are in and providing value to these customers, the idea that some startup who is going to come up and pick you off is going to be much more difficult. They really are reliable cash flows. Then of course, with the pandemic, you add on this acceleration of digitization that is occurring, where everyone wants to get ready for the next wave and do more with less, and software is eating the world but now, it is just eating it faster than we thought. RAOUL PAL: We had the accelerant of COVID in this recession. What is the state of the industry now? Because obviously, video was one of the big uptakes. We have been in that in Real Vision for a while and realized that video was going to basically destroy all forms of media because now it is getting easier and easier and easier to do. Even
businesses like ours have gone from being more media like to more SaaS like in the way that it operates margins, and it is incredibly liberating. We are also seeing it with money as well. A lot of people who watch Real Vision are very interested in Bitcoin, the rise of cryptocurrency and blockchain technologies. You can see money is about to be disrupted in this whole process. Let us talk about the state of the industry now, where we are because we have also got unbelievable valuations because everyone is trying to value these-- what does it look like? 100-year bond with growth. People are struggling with that. Let us go through that. Then we will start walking into the future of it. GORDON RITTER: How are people valuing these businesses? I fundamentally
believe that it is a stream of cash flows, there is DCF work going on here, obviously, with a lot of where is the upside going to come from? Compared to any other bond that is available, the credit quality there, that is one of the reasons why enterprise is so hot right now, and especially those that are selling to larger companies, midsize and larger companies because the chance of all those companies having a credit challenge, I know you have been talking recently about the credit potential squeeze ahead, but the quality of most of these large enterprise SaaS companies, and the companies they sell to is so high that chances are unless they make a misstep, it is just going to be continued to sell all the way through. As I said, layer on this new wave of machine learning and AI, where we can, we think as an industry, appropriately charge more and more dollars for what was workflow software but now, it is network effects software. I will digress for a moment. One of the things that has always angered me about the consumer side is this misalignment with the customer. We are seeing it with the show on Netflix around the social dilemma and everything else. We all understand it but let us really parse it out. The social network value of Facebook, and Instagram, and Twitter is one that fundamentally takes our behaviors, harvests our behaviors, and then does not give us back any value. I sell it to a third party, it is that we did not know it, but we are the product.
Everybody now gets that. What is interesting is in the next wave of software, we are both the behavioral expertise that I have about certain things, and you have about others can be captured like multi-tenancy. If all the users that are on, and I will give you some examples of companies that are early on this but for now, if I, as a user of software, can help that software company understand the habits of the best users, and the way they use it most reliably, and most usefully, and I can, as almost like a best practice network, share that with other users on that software, and you have this constant evolving best practices world, that is a network effect business. Here are the critical differences. Everyone says, oh, so are not you just going to start harvesting
me as a user of your Slack software or something? That difference is I am aligned with helping your employer make you more productive, I am not trying to sell it to a third party, and then ultimately, not close the loop. Yes, things could still go wrong that if all of a sudden, the employer says, hey, Gordon, I can see that I have been able to let five employees go because you have made me so productive, but we are working on a strategy we think will have longer term value, which is, as long as we are making your employees more productive, you are going to pay us more, but we are not trying to write them out of a job. We are not focusing on RPA, which is robotic optimization. We are not focusing on automation, which again,
can get rid of workers. We are trying to work on ways to help workers evolve faster, train faster, be up and running quicker. I can take you through examples in sales, in knowledge management, in writing, we are working on all those areas. RAOUL PAL: I would love to hear it because this is now where things are going. Because we look at them- - and we will get into machine learning and AI because that is fascinating as well. This is supercharging the humans, they are doing the data science or the marketing team, or whoever it may be, and giving them the hive mind of all of the customers. We were looking at a product called Pecan. Pecan basically uses everybody's data and
all the algorithms they have been learning to increase the quality of everybody's data, which is exactly what we are talking about against. GORDON RITTER: That is right, and there are levels of-- we are calling this fundamental trend because we wanted to separate it from automation and all these things that everybody is scared of. We are calling them Coaching Networks. The concept is one is either an executive coach or an athletic coach, what are you doing? You are gathering unique behaviors of your athletes that you are working with or your executives. Then when you go meet the next person, you are fundamentally saying, here is what I have learned, I take a little bit from one exec, another from another exec, and here is what I think will work for you.
This is not going to be human-based, this is going to be software-based. It is going to be that software will learn those habits that have the best outcomes-- I will give you an example because it will bring it home. We have a really interesting company called chorus.ai. Chorus sits on top of Zoom so we could be using this if I were a sales rep and you are a customer. I would know by the signals of what has worked well in previous conversations, are you an introvert? Are you an extrovert? What is your background and so forth? What angles to use to have a conversation with you to bring this home. RAOUL PAL: It gets sales skills,
essentially. GORDON RITTER: The key is it is not a Glengarry Glen Ross sales skills, this is tuned by what you are interested in, all the data about your business, but also behavioral data, like I see you are crossing your arms. Is what I am seeing right now, is that a positive or a negative as I am commenting? We have real time feedback, and I have to start very simply. Simple things like, hey, Gordon, have you asked a question in the last 10 minutes, or are you just babbling? What is my talk time versus your talk time? These are very simple things to do now but you can see where this is going, that software will make-- what I love to say is it is the end of forms-based software. Forms-based software where we take all of what we understand reduce
it down to a little form field and say, Raoul and I had an interesting conversation about x, why not capture the actual conversation, everything that is going on, and then use machine learning and AI, it is mostly really machine learning, to analyze those trends and help us figure out how do we improve our game? We have examples in manufacturing and as I mentioned, augmented writing, in knowledge management about a company called Guru that will pop up a card and say, here is where the world is headed, so I will not overdo it, but I will come up with a piffy equivalent to software is eating the world and it is going to be that this, humans are going to take back control. RAOUL PAL: Sounds like it is augmented humans. GORDON RITTER: Augmented humans. Yes, it is. The key is, and here is my-- if Marc Benioff was, and he did come up with multi-tenancy as a breakthrough, my mind is a little longer but in the age of AI, humans are the only mutation engine. We are the only ones that actually advance the game. AI is very good at optimizing, but it does not know what to try next. It does not know what the next thing it should try. It could randomly run around and try things, but you are going to have a lot of just ridiculous outcomes. Humans have this context that lets us know going down this particular road
might really work. Sometimes it does not, but the system can understand that trail that I went down worked and was different than the ones before and it learns from us. RAOUL PAL: Yes, because we were able to make hypotheses and test them in a way, so you are pointing in the right direction. My example of this always was when they finally discovered in London what cholera was, there was a lot of different people saying it is an airborne thing. It is this, it is that, it is this and a guy mapped out all the cholera outbreaks, and realized they are all based around water pipes, but only some water pipes and they were the ones that came from the Thames and not other water sources, and then he figured out it was a waterborne virus. That is very difficult for a machine to learn because it takes a long time because it knows nothing. A human can say, here
is a potential, let us test. GORDON RITTER: That is right, and it really if you think just doing a through line over 20 years of software since Marc and the multi-tenancy concept really came alive, multi-tenancy is a simple forms-based network effect. Learn, customer fix, helps everyone. This is just taking that to the nth degree. It is all of our behaviors, all the things we do that are brilliant. We have certain things we do that are not brilliant, and we are just going to tell you what not to do, potentially. Then other things we do that
are brilliant, that are fundamentally new ideas, and as humans, we will evolve faster in this next generation of software that is coming because you are going to be able to learn quickly, in effect, the wisdom of the crowd or the hive mind, but it is going to be behavioral not words. It is not Google. It is actual behavioral data. RAOUL PAL: What is also interesting to me is where words and behavior comes together, which is GPT3. This is a huge thing that is about to happen because it is the blurring of when machines can write pretty decent language that you cannot tell if it is a human. GORDON RITTER: I hear you, and I have had lots of conversations with folks that know it better than I do. I am of two minds, if we all get into ruts, I love to say, it is like, what I tell my kids, it is what I tell our CEOs, avoid ruts. If you just are constantly doing the same thing every day, the AI has got you figured out, it really does. I have a bad VC analogy of
involving Vests, Teslas and towns on the peninsula. They have got you figured out, and I will not do that, or else figured out, I am sure, but if, as humans, we keep-- writers, my dad was a writer in Life Magazine, and writing, if we start doing standard writing, yes, GPT-3 is, and four and five will take us out. RAOUL PAL: The issue is the rise of behavioral economics, once you have got data set, the machines end up getting better, as we have seen by Facebook and Google and everybody else, is the machines get better understanding of human behavior than a copywriter would, so you end up with more powerful copy and more dangerous copy. It is just very fascinating. GORDON RITTER: I hear you, I guess we can say,
throw up our hands and maybe in the long run, that is the answer but I just do not believe that, or, again, the other thing that always upsets me is the idea of universal basic income. Is that our best solution in the world? We want to raise workers of whatever level and type and not treat them a, oh, my goodness the world will treat us as if we are all disposable. The question is, the main thing we want our kids to do and any workers in our businesses, employees, is just iterate, try new things. Do not let GPT-3-- do not start believing what you are reading there because there is an added level of value. RAOUL PAL: That is a question I want to ask you, just what your
views on. We talked about a little bit before, it is Facebook, Google, that spread of online staff, the ownership of our own data. Where is this all going? Because it feels like we are at the end of the social media phase, and something has to change? GORDON RITTER: I am on the board of a group called Common Sense Media, which is more focused on kids' privacy, but it is a great model for the way we are going to have to own our own data, we are going to have to, obviously, with what has happened to GDPR that is already occurring, the California law around that as well, this is a trend that has got to continue. I see it as a one-way door, we are going to have to be in control of either get paid for when we give up our data, or just be able to block it much, much more efficiently than we do now. RAOUL PAL: Yes, because I was thinking that-- to go back to the universal basic income, is, if you actually got paid part of the monopolistic rents that is extracted by these platforms for your attention span, it actually solved quite a few problems. If you have your data, you own it, I know Tim Berners-Lee is working on something like this, a lot of people in the blockchain space, like Brave Browser are trying to do this as well.
If you own your attention span and lease it out, you can create income, which makes sense then. GORDON RITTER: Yes. The issue is that the pain of the business model shift where we are not getting these things for free, and we are trying to decide what 25-cent charge we want to receive to be on Facebook or something, that is going to be a big shift and I wonder if the Facebooks and the Instagrams of the world look anywhere like what they do now when this new model occurs, because talk about undermining their business model. The business model has been free labor in effect, and what happened? RAOUL PAL: That is dead right. It is free labor. GORDON RITTER: Free labor, and the labor is also the product. It is not just labor. It is the entire product
unto itself. RAOUL PAL: Yes, and that cannot sustain. What about, again, on this topic, deepfakes, because that is like the GPT-3 where anybody could become anything, what do you think about that as well? It is another difficult thing to control in this whole environment. GORDON RITTER: It is very difficult to control. I think in the same way that we have to control our personal data using DRM, digital rights management solutions are going to have to be at a whole new level, watermarks are not going to work. There is going to be a new level of authentication that has to come in to every now image given what is happening, and you are right, where this can go, we are going to have to have what they have for the seafood industry, from the catch to your table, we are going to need that for everything. DRM is going to be another area of massive-- RAOUL PAL: That sounds like a huge business in its own right, because it is a massive problem that needs to get solved. GORDON RITTER: Absolutely right. It is going to take time, because these are just
hard challenges for us as consumers to go through. The question is, do you want to be too early or a little bit further on, but it is a big challenge. RAOUL PAL: What exciting stuff are you seeing in machine learning? Because it sounds like a lot of your focuses on this application layer of machine learning. Where do you think the really big breakthroughs are coming? Because it sounds like
everything is going to change again. We are struggling to deal with so much change, but it just sounds like everything is going to change again. As you said, to give an average salesperson the tools to be a good salesperson with onscreen prompts, that is a game changer for many. Because then you can hire a 22-year-old who have no sales experience and just say, listen, be a nice guy, follow the prompts, off you go. GORDON RITTER:
That is again, I will not dwell on it, but that is the robotic side. The key piece is if we can take a 20-year-old and get them up the curve to being a BDR, business development rep, and take an experienced salesperson and move them up to being exceptional. It is all levels of the game that it is not trying to robotisize, that is a bad future. RAOUL PAL: It is like, do you remember the series from our youth, The Bionic Man? Because what you are doing is you are giving humans the processing ability to do things we cannot ordinarily do as effectively. Sure, some people can. There is always a more talented salesperson than any machine learning will ever
be, but in general, it just gives us superpowers, which is amazing. GORDON RITTER: Let me ask you, given what I said earlier about coaching networks, where do the superpowers come from? Is it the AI? Is the algorithm? What is it? RAOUL PAL: No. Well, it comes from the actual source, which is the people itself. GORDON RITTER: That is the key, which most people do not-- they think it is augmentation because of algorithms or AI. It is actually augmentation of other humans helping you, improve that system called software. RAOUL PAL: That basically what was done at Real Vision. It is to bring all this financial knowledge into one place,
where you are basically learning from everybody and the community itself, writes posts, discusses it, and debates it and different people have different backgrounds. There is no other way you get this knowledge. GORDON RITTER: Exactly right now. A lot of the challenge then would be as a user, that is what, obviously, Google has done pretty darn well. Everything can be in one place. You are doing it within a tighter, as we are, in a tighter industry focus. It asks the user to divine some of those insights. It is saying, hey, I am listening to this
video, and I will take a little snippet from Gordon about this or a little snippet from your comments. It asks the user to do a lot of organizing. What that real future is imagine if that organizing is done for you by the software and you where it is going, and inject it just in your moment of need, just when you need it, you need that little in the moment training, imagine if you will get that idea and say, oh, that is right. That is what I should do next. Well, it will take a while. This is hard to do. Imagine in real time, exactly when you need it to get that prompt, in whatever industry you are in, whether you are a trader, Bloomberg should have been doing this all the way along. He never really took that amazing screen he has got and turned it into an asset. RAOUL PAL: Bloomberg built one of the
greatest software products I have ever seen and then just abandoned it. What he could have done, if you see where incredible investment firms like Renaissance Technologies have done with technology and machine learning, he did not do any of that, but I guess he is worth 65 billion, so he was not that motivated. GORDON RITTER: He has done well to say the least. Here is what also, a lot of the reason why these shifts cannot occur and they have to be done in these 10-year increments, and there will be a new wave of winners that are not the ones that came before, is because of things like contracts and agreements. Marc, for example, I am sure, Bloomberg as well, his contracts were always written that it is not our data, it is your data, you as the customer. Anything that is in the Salesforce system is not ours to do anything with, it is yours. He has since, Salesforce has worked very hard to rewrite all of those contracts,
but until you get those rewritten, and you have a different in effect relationship with the customer, you cannot do that. That is I think one of the biggest challenges ahead, is for all these things we think we can do, we have got to have the customers trust us, and certainly not think of us as Facebook. Facebook is on the category of almost zero trust because you are harvesting. It has to be looked at as we are here to be like McKinsey, but we are doing it with software, we are going to help you. RAOUL PAL: Your point was dead right. Once it is in a vertical and it is a walled garden, and you say, well, everybody here benefits from each other and the data does not go elsewhere. We will use your data and everybody else's to improve your experience, which is essentially the same idea you had with SaaS in the very beginning, is that everybody improves on the product. Everyone says fine, I agree. I am going to
chip in my data and we will all benefit. GORDON RITTER: Exactly. Just imagine those relationships, those conversations that way that said, it is all going to be incremental. It is going to start in ways and it has to, it should start in ways, as I said, with simple prompts that use metadata but nothing very specific. Everybody has that sense of trust and comfort. That is going to
take time, that is not going to be overnight that people can do this. In the same way that multi-tenancy is now just being understood 20 years on, this will not take that long, but this could be a fiveto 10-year cycle of what I call this next era of software. RAOUL PAL: Is Shopify part of this? GORDON RITTER: Shopify, interestingly, I probably should not comment on which of the companies I just mentioned are powering a number of basically all Shopify employees, so I will not comment there. They are very much in this model of learning from best practices and habits of their merchants, and then finding unique ways to add value. eBay did a bit of this in their early days, we use that analogy. They tried to help you with your bidding strategy and your pricing optimization, but it was rules engines. It was very nondynamic and stilted.
This next era is going to be you are going to work with companies and realize oh, my God, every time I work with Shopify, or I work with-- it could be Slack. Let us use Slack as an example. I keep seeing new bits and pieces that show up that make me better at using Slack every day. RAOUL PAL: Slack has not done that yet really. GORDON RITTER: No, again, it is not going to be-- well, between you and me, it is going to be a new generation of companies. RAOUL PAL: Because it has to come from the DNA of the company, because it is too hard to do otherwise.
As you said, even just repapering all the contracts becomes a nightmare. GORDON RITTER: Yes, and think of it these big moves, we have mainframe software, we had client server software, and we had-- I will say an almost past tense down-- cloud for what I have to do for living. The next era is going to make all that cloud software look like forms-based workflow 5% productivity improvement software, some of those companies will make the move to this new world, but the vast majority will not. There is going to be a new set of winners that take advantage
of this next phase. RAOUL PAL: How the hell do you go about finding these companies now? That is what you do for a living but it is like Voodoo for me because I might, you have got to listen and sit down and listen to all of these pitches and figure out which ones make sense, which ones do not, which ones. How do you do that? What is the magic in what you do? GORDON RITTER: First of all, at Emergence, unlike many firms, as I said, we have had success and we have stayed focused. Those two things do not go together. Usually, success makes people add lots and lots of
teams and people around it and to monetize that success. We are trying to stay focused. With that, we are very thematic. This idea of coaching networks is pretty much all I am doing. I could look at investments from 100 other areas and in some ways, it is a good idea because you want to keep learning new segments, but I am focusing on this because with focus, I sit down, and if you are an entrepreneur, and you were doing something in the AI space, I would get a tighter version of what I just said to you and they would be, like, I get that. I see why I am going to be commoditized if I just make a forms-based software company. You commented earlier, cloud software, one of its biggest opportunities and issues is it can be replaced, not in enterprise, but it can be replaced with the next generation. The next generation, that iteration speed is going to get tighter and tighter, so what was 10 years in the cloud, it is going to be five years. RAOUL PAL:
The cloud is going to look dumb. GORDON RITTER: It is going to look dumb, and it already does in many cases. You have to keep moving and you have to almost continue to re-architect your software to take advantage of what we just described. With entrepreneurs, I, and we, as a team sit down, and
we just tell that story. We are storytellers at the end of the day, and we tell a story of a future. The entrepreneurs either say, I get this, and I have to work with you, and I think that this is an interesting future, or they say, reasonably so, we have got another plan. I do not quite understand it, or I do not want to understand it. RAOUL PAL: How do you find these companies? GORDON RITTER: In part, the world is now a very connected place, a well-placed blog or content piece, as you know well, can be read by lots and lots of people. We have always put out
semi-provocative statements about the future of the world. Now, these coaching networks is not automation, or us or where the AI got in. Nobody listens to that because it is too broad and shallow. We are quite specific as to what we are looking at, and we actually talked about ourselves as a hybrid between a startup and a venture capital firm. Startups have to focus. They have to tell stories. A venture capital firm often, back to hedging,
has cost. If you start just being, I do not want to, as a partner or as a firm, be too pigeonholed, to me, that is where the problem lies, is you should be willing to say this area really matters and I am going to own it. RAOUL PAL: Concentrated bets all the way for better returns, always, as always [?]. GORDON RITTER: Guess what? It is scary. Having a concentrated portfolio, everyone knows it, but you really need to have a lot of conviction as a money manager to do it. Then as GPs or the investor or the entrepreneurs, you really got to have it. As you come down from the
LPs to the GPs to the entrepreneurs, it has got to be a further level of conviction and risk taking tolerance. What I noticed is as the venture industry typically has success, mistaking goes out and hedging comes in. That is the obvious-- RAOUL PAL: Yes, you see that the whole money management industry. As soon as people have more assets under management,
they stopped making returns, because they will look after themselves. It is a weird old world. What could make you wrong? You are taking the concentrated bet. For me, it sounds like, well, it is a great story. That is part of it. It attracts capital, and it attracts entrepreneurs. It feels like it is right, it feels like it is a very logical step, because we as a business are looking at some of these things saying we need this. How do we go about it? It is pretty nascent. Where could you be wrong? GORDON RITTER: Well, first of all, I want to make it clear that the firm as a whole is not focusing only on this. We have three, always have three parallel core thesis areas. We do 80% of investing within those three areas. Quickly, the current ones are what I just
described. That is probably the leading newest one, then the whole deskless workforce concept, it is mobile, but it includes drones, includes anything where 80% of the population does not sit behind a desk every day. They are out in the field. Now, these days, it is harder to do, but we will return. That is a whole another category of investment that we think is just an inevitable trend that is going very well. Then the third and the older is industry cloud. It is this focus of
cloud focused industry, cloud focused companies that only look at one industry at a time. RAOUL PAL: More specifically, you are risking your reputation because this is your baby. GORDON RITTER: Correct. As the founder of the firm, I get to do these things, but no, it is also really important. It is that it is we want to, within our team, develop that sense of--
our core value is we focus to drive conviction. That is all. We have two others I will not bore you with, but those are our core values as a firm. As members of the team, we want to develop that as new folks come up the stack, and we do it around hunches and themes and minor themes, major themes, have that development of themes be the currency of the farm. Guess what? Those are the things that humans do uniquely well, where we can outprocess machine learning, we can outconceive, we use our frontal cortex, so we just got to do that all the time in any industry, but certainly in the VC industry. That is where you got to focus. RAOUL PAL: To go back, the question is
what could go wrong with your thesis? You have made your bet. You are doing the work on it. You are finding the opportunities. You are picking whichever companies you decide to choose. What do you sometimes think, God, I hope that does not happen? Is there something here that concerns you? Where is the risk in the that? GORDON RITTER: It is a good question. I probably should not go
on record with this, but why not? Yes, it is a little bit to what I commented on earlier is transitions are hard. We are used to a business model of the system of record business model of cloud. It means all of your data, before you used to have your CRM system on Siebel, now, it is within Salesforce, it is a system of record model. Those records are those little form fields, those little database elements. System of record has nice pricing metrics to it. $100 per user per month is the Salesforce model that they created, it is nice predictability, it is a known model and a known pricing. In this new world of "I help you do your job better", what is the pricing for that? Is it a constant campaign game? You have to keep your game up to keep the videos going, to keep the community going. I think there is a sense from buyers early,
because this is still such an early phenomenon, like it was with Salesforce, that is a toy, I am not going to pay $100 a month for that. Well, in the end, they are happy to do it. In this new world, this idea of having a self-improving engine of value coming through software is harder to price. It is not a fixed price per user per month. It may be fixed, but it is going to then have to be, well, I got a lot of value this quarter, but I did not get as much three quarters out. That does not mean it is not a good model. It
just means it is going to take some innovation to work through that. The analogy would be if you did not have the advertising model to keep people coming back, and you have to charge for Google to give you all that value that when we can search and find something immediately that we needed, what would we pay for that? We pay a lot, but it might be hard to-- especially when you had been using it for free, what do you pay now? It is a new business model that will take some time. RAOUL PAL: That is just how do you drive adoption, essentially. Once you drive adoption, you can charge well. The old model was give it for free, and if it work, who knows how this work,
but somebody will figure out a business model here that will make it work, whether it is something maybe it is more around the amount of processing it does for you, or the amount of work it does for you, essentially, something like that. GORDON RITTER: There is a lot of ways to look at it in terms of each of these functional areas. How does it improve? Does it improve sales close rates, but the hard part is whenever you are attaching to a delta in close rates, let us say or any metric, it is hard to charge a percentage of that for long. That is because people like in the beginning, but then they are like, ah, I am getting enough value. I am not sure if you are doing anything to improve it. Do I really want to pay that much? I would say that is the
question that we have to work out as an industry as we go forward. RAOUL PAL: Another thing I would like to pick your brain on, because it is clearly about to change massively, is education. Got any thoughts on that? GORDON RITTER: Yes. I am on the board. First of all, we are the largest investor in Zoom. I do not know if you knew that, so we are seeing how Zoom is changing,
back to the behavioral insights that we all can have now, guess what? Of course, is the ultimate example because it is a sales rep, but the same thing is happening in both K through 12 and higher education. A company we announced recently called CLASS Edu is doing primarily K through 12 education within a Zoom context of how you can have hybrid learning, cameras in the classroom, but the teacher can be up on one part of the screen. They can immediately know who is raising their hand. All the things that Zoom as a horizontal platform was in tune as well for, CLASS Edu is going to bring to education in K through 12. Higher ed, I am on the board of a company called Top Hat that has 750 large institutions in North America, all standardized on its classroom engagement model. Now, they are bringing in the virtual classroom as well. RAOUL PAL: You are not even just looking at the SaaSification of education, but you are actually looking at the next application layer on top already. GORDON RITTER: Exactly. It is happening that quickly.
Yes. Partially, again, this pandemic has just made things-- some industry makes things happen faster, either bad things happen faster, or good things happen faster, or in between, we will not know. This digitization of the world through Zoom is an opportunity, obviously, we will be-- RAOUL PAL: For example, my wife is a certified behavioral analyst treating kids with autism. Now, once you use AI and understand the prompts that kids with autism do not pick up, they can have automated prompts. Because it is just basically the data saying this facial expression means that. Things that they do not understand as kids. GORDON RITTER: Maybe bringing it all back, the old idea of taking the world, whatever world we are experiencing, and reducing it to a form field and typing it into a database, and these are all databases, is the fundamental breakthrough, that we are not going to do that anymore.
We are just going to be, your wife is going to be on with her patients or students and she will not even know what she did that was brilliant that got that student to smile or do something different. The system will go, that was amazing. What you just did and got your student to all of a sudden, do something, and you do not have to then document it and write a note out or anything, it just captures it. It is done. It is now in the literature and the world is now instantaneously smarter. Then guess what? Her colleague in Australia had another breakthrough that just came back to her. That is where this is headed. RAOUL PAL: Look, it is terribly exciting, but how do humans deal with this pace of change? It is astonishing. If we just think of 2010 and
Facebook onwards, it shattered societies, it has changed what we do. It has changed everything from sovereign boundaries of countries, because now we have become tribal online. Everything is changing so fast. The just system of money is about to change, but how do we deal with this? GORDON RITTER: I said that agreements are going to have to be rewritten. Our agreements with software are going to have to rewritten. We are going to have to trust that software is not over running us and not saying you cannot absorb that fast enough, so we are just going to leave you behind, humans, and just do it ourselves. Just iterate with it machine to machine. RAOUL PAL: Think about somebody who is elderly, let us say my mom. Now, she is not in the workforce but imagine she was still in the final days of working, her ability to use this software is going to be relatively low, because she is just not used to interacting with technology. Somebody who has come out of gaming as a kid is now 20 years old has
such an advantage in this space. GORDON RITTER: I do not know. I will push back. It is going to be-- we have already seen that software is becoming more and more specialized. You are going to be able to make a lot of money, even if you only specialize in a certain subset.
The example would be in the case of your mom, there will be a version of the software over Zoom, which has a friendly way to give that feedback and the prompts will only, I know, I know, but-- RAOUL PAL: Obviously, of course, why would they not? GORDON RITTER: Yes, and you are not using software. That is the other part, is if software is done right, there is a little-- the example-- I do not know if you have seen the clicker analogy for doctors when you are trying to teach a resident about a new surgery. They do not want to distract. The persons trying to save someone's life, they have a clicker, and they just have in their pocket, they just click which is just saying you did it right. Like, that was great. RAOUL PAL: They did that with delta trading,
by the way. GORDON RITTER: Of course, yes. Yes, exactly. RAOUL PAL: [?] analysis. GORDON RITTER: Imagine if for your mom, or I will say your mom because I like saying it that way, that it just gives a little thing on the screen saying, hey, that was awesome, or like a little bit of-- and nothing more complicated than that. Not a bunch of dials and screens. It does not look like a Bloomberg terminal for the 20-year-old and maybe a Bloomberg terminal if they are ready for it, and then there will be everything in between in terms of helping us learn faster. RAOUL PAL: This makes it sound to me that Siri and Amazon Echo and all this stuff is already going to be out of date. GORDON RITTER: It will have its peace. Privacy wise, we do not have one in our household, like my wife would never-- no, I do not want anybody listening to me and so forth, but that is true. We will see. RAOUL PAL: They are basically search engines. GORDON RITTER: Yes.
That may be one of those local Maximus that do not actually matter in the long run, but they got us a certain area, and we got to go back and re-evolve a little differently. I think Zoom in particular, not at all talking about directly our company, but what Zoom has created and what the pandemic has required, is that we are now more digitized than we were before. The ability to help is that much greater, and potentially, the ability to do harm, but that is, again, what I am most focused on is we have got to do the right thing with this technology. That is very important. It is like Microsoft saying, we are going to be the father figures in this world, and I think they are doing a really nice job protecting our privacy in ways that are ahead of other big companies. RAOUL PAL: This is absolutely fascinating. If people want to
invest in anything in the public markets, because a lot of people do not get access. Yes, a lot of our subscribers are high net worth, or professional investors and stuff, and then there is funds like your own, but if they want to look at some names and get to understand companies to actually trade outside of Zoom because a lot of these trade on PEs of a gazillion, it is very difficult. Anything interesting that you would say? Okay, that is an interesting company you should look at. Well, it is not an investment recommendation, but just something to look at. GORDON RITTER: Here is what I have been saying to let us say, my buyout friends who are further up the chain, and therefore, either some are still private, or have been brought private. Data is king, and that is obvious like the idea of just looking at your forms-based software, it is what information are you capturing with your customers? I would look at companies that whether it is in the insurance-- go back industry by industry, which companies have unique data assets that they have not monetized yet, and they can figure out how to-- it is not this ultimate end, but it is this initial step of companies that have unique proprietary data sets are going to trade better in the next five years than they have in the past five years. RAOUL PAL: Final question,
why the hell is Google net worth even more? Because they actually own more data on everybody on earth than any other entity. They really use it. GORDON RITTER: That is it. Here is my issue, it is a little bit like bringing it back to focus on investment. Think of them as one big event, they are too broad. They are peanut butter. Yes, they want to be good at these, but it is going
to be in some ways-- first of all, they have a fabulous business, and we all are envious of it, but they will not also be able to-- like Salesforce was not able to do Viva which ultimately was the first product line that was built on top of Salesforce. That is how we got started. It is hard for a company to be both horizontal and focused in a certain area. The highest margin companies going forward are going to be those that in effect, vertically aligned, because they have more data that is in context. It is all about context. RAOUL PAL: Deep and not broad, so the opposite of the last decade, which was broad and not deep. This is deep, and not broad. You own everything and understand everything about one space. GORDON RITTER: Yes,
and I think it applies to the investment world, although what I think we are doing as a firm is be focused and you have just outsized returns, because you are competing against the broad and shallow team, whether it is investing or startups and companies, same thing applies. I think that would- - maybe my parting comment would be those of us that are willing to stay focused, have better context, either in our investing strategy or our ability to create new software, the tighter we are, the more we can create magic for our customers. If we can create magic, we are going to get paid really handsomely for that. That transition, it may be existing companies that figure out how to do it looking at public companies, or it is going to be the new ones that come up the stack. RAOUL PAL: Yes. I actually wrote an article about this that
concentrated risk taking is actually what accumulates more wealth than anything else. There are a few platform players. There is a few of them, but few. It is hard to be an entrant and beat Facebook, for example. In investing, it is the same. Some of these hedge fund platforms,
big asset management platforms like BlackRock, fine. Actually, all the returns come out of concentrated bets, but same with entrepreneurs. GORDON RITTER: There is no question. I guess if we think about then big public companies that are doing workflow software,
are they going to be able to make this transition to this new world? They could. Some could. I do not want to name names. I feel like it is inappropriate of some knowledge I have. If you look at all the cloud companies and start putting a sense of are they focused? Do they have particular focus areas? Have they shown a propensity to turn their workflow software into more McKinsey like value? Now, the death of McKinsey concept, I would be looking for that if I were a public investor. RAOUL PAL: Also, what great tailwind
that you have got is they are all going to buy companies to try and figure it out. The whole space is going to trade at a premium. There is plenty of exits to be done. Everyone makes a lot of money while they flounder around and somebody, a new entrant figures this out. It almost always