The Future of SaaS Investing, Machine Learning, & Data Privacy (w/ Raoul Pal & Gordon Ritter)

The Future of SaaS Investing, Machine Learning, & Data Privacy (w/ Raoul Pal & Gordon Ritter)

Show Video

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 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.  

So if you like what you see on the Real Vision  YouTube channel, that's just the tip of the   iceberg. You should come to and  see how we're not leaving any stone unturned.   From publishing more in-depth videos, live  discussions, written reports, and our latest   feature, The Exchange, where you get a chance  to engage with experts, fellow subscribers,   and learn from everyone's experience,  which can't be wrapped in a video.   It's an experience which you live and learn from.  So if you go to the link in the description or go   to, it costs you just $1 to get  a month's access to this incredible content.   I don't think it's something you can  afford to be without. GORDON RITTER:  

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 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 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 

2021-01-27 17:16

Show Video

Other news