EP 150: Bret Taylor (CEO, Sierra): A New Class of Software Winners

Thank you for doing this. Thanks for having me. I'm glad we got it on the calendar. It's a good time to do it.

You guys recently announced a new round. Congratulations. Thank you. I appreciate it.

It's a nice milestone on the journey. You could test them at the way you guys have built the date and where you're headed over time. Yeah, it's a milestone, but I think it's a way to put it. You know, raising financing is just, you know, adding fuel to get to the place you want to go.

And I think for a entrepreneur like me and my co-founder, Clay, it's, you know, we want to create a enduring, durable company. And so it's just that, just a milestone. But it's good, good time to reflect. We're really proud.

I think we're the clear leader in the space we operate, which is AI agents for customer experience, customer service. But I always talk about how similar this AI wave is to the original internet wave and altavisto is first and Google is the one who writes the history book. So we need multiple years of sustained, impeccable execution, basically from here. And that'll be happy.

But I'm excited for the milestone. There's the nor Mcdonald joke that like the good guys always won in history. It's like, you get to define the terms of success in that way. I guess what do you think to that?

And when you're making that comparison to internet versus AI, where do you think that parallels exist? And what do you think breaks down as you kind of think about comparing the two? One thing that I think is quite similar is there were some very obvious bets on the internet like search and e-commerce being two of the most prominent impairments. You know, you didn't need to be that savvy about the internet to think, wow, it might be useful.

People could buy things, you know, digitally. And the question was who will own that market? Will Amazon and Buy.com had very different strategies, even different portfolios of products that they initially sold?

Amazon clearly had a much better both strategy execution. There's a lot of details they got right. Look at the search market. You know, I mentioned altavisto in Google, but one of the more impressive technical companies that we competed against was ink to me.

They had a really good engineering team and you know, I could tell you why PageRank was better, but they had a solid team, but they had a B2B business model. They're essentially licensed. They search engine to portals. And that left out the opportunity to create outwards, which turned out to be the greatest business model of all time.

So there's so many details that, you know, dictate whether you're the one you turn into Google or altavista or ink to me. But going back to your question, what's interesting about the AI market is there are a few areas that are obviously going to be impacted by AI, software engineering, customer service, content marketing, visual effects industry. There's probably others, different than the legal industry. And as a consequence, you know, it's not like, I got this great idea.

Hey, if I told you, oh my gosh, AI for customer service, it's not the concept is obvious. The question is, do you have the right product? Do you have the right good market model? That's what I mentioned, the ink to me, Google thing, you B2B or you B2C.

What is the packaging? What is the form factor that will become dominant? And so as a consequence, it's an intensely competitive time. Just like my recollection of the .

com era is. And I think that's really interesting. So you have very clear markets with very intense competition. And that's different than other markets.

You know, I think in the mobile phone came out, some of those categories like ride sharing wasn't like a self evident market. And then there was a couple great insights and created the ubers and the lifts of the world. I think right now, many of the biggest markets are already known. And as a consequence, one of our company values is actually competitive intensity, which is unusual.

And it's the first line of that as we know we're not entitled to our success. And I think it's a really important part of being successful in this era. We're a bricks down. I think it's shifted the landscape of what is a software company.

I love the example of Harvey is a company I really admire. I can't think of like a great legal tech company. I'm sure there are a couple. I don't mean that in a backhanded way towards any of them.

But it wasn't like as you went through the top 10 enterprise software companies in public markets. There's not one in legal tech, right? There's ERP systems and CRM systems and all these others. It's just not one of the key categories.

In part, because the tam for selling productivity enhancement to lawyers is not that big. But now all of a sudden with Harvey, you're actually doing the work and doing the antitrust review. All of a sudden the total dressable market looks huge because the addressable market of legal advice and legal labor is actually quite large. So that's really interesting to me because I think the traditional perception of where there are addressable markets in software I think has been upended because agents aren't simply productivity enhancements for people, but actually doing a job.

As a consequence, I think how you evaluate the value of a piece of software starts to move away from traditional software productivity metrics. Think about a CIRA agent that actually makes a sale for you. The way you would value that is not really even related to AI or software. The way you'd value it is basically one of the margins on that sale.

What would be the commission you'd pay a person to make that sale? And so as a consequence, I think it really has dramatically shifted the traditional view of how to value software, just as either a venture capitalist or an economist, it's really changed the markets. And I think I'm excited for that. I think it's going to be a really positive thing for industry.

The other great thing is I can dub over you saying Harvey and slice and LaGoura for the totality of that. And so we don't have to give any plugs to, you know, to hearty throughout this. It's a great market. No, it's a great example too, though.

I'm curious, like one of the things that I've thought about with your example, and I'd be curious what you think of this is like, this some extent, the outcome-based pricing in general is so demonstrable ROI. And it's very clear what people are willing to pay for it in some ways. And also, you're somewhat beholden to alternatives in some ways. And so I think about what value I get from Zoom.

And if Zoom was the only thing that existed in the world, I don't know. We could probably get Red Point to pay $10 million for it or something, right? Just because it's like that impactful to our day to day. But they don't get to charge that because there's teams and there's Google Meet and there's there's other stuff like that.

And so I guess as you think about outcome-based pricing for your business or for Harvey and LaGoura, like doing work in that way, is there any framework or like how do you think price pressure plays out in some ways when there are these alternatives that can exist? Do you think that it ends up eroding some of the the ROI pricing that you can get in the early days? I have a slightly different way of thinking about it, but I'll try to answer your question directly too. You can reject my question.

No, it's like really obnoxious. That's a different question. I think part of the reason that there's price compression for tools like Zoom or Slack and Teams is in part because the value you get from a sort of horizontal productivity tool is very hard to measure. If you just think about running a 120,000-person company that's a global company, you're paying per seat for something like a Zoom or a Slack or something.

It's sort of funny because you're paying the same value per seat for like the most sophisticated research and development engineer and like the new grad in your pick the least strategic department of whatever that company does. As a consequence, I think when you're thinking of horizontal software, whether it's productivity software, communication software, you end up with pricing that is somewhat commoditized and there are some rare exceptions where companies are able to charge premium.

In contrast, if you look at the enterprise software market that are oriented towards departments, say service now for ITSM or Salesforce or CRM or SAP for ERP systems, the value that those companies derive per seat for their application is traditionally much larger, usually more than an order of magnitude of software like Zoom, even though many fewer people use it, but it's closer to business value. You know the value of balancing your company's ledger and auditing your financials before earnings call, you know the value of a sale.

As a consequence, the business value you're selling is more measurable, it's closer to that business value. The analogy I would give for outcomes based as we're going from impression ads to CPC ads and one way of looking at outcomes based pricing that I don't agree with is you're leaving money on the table. That would be like making a modern, you know, cost per click ads auction saying you're leaving impressions on the table. And that's not the way anyone thinks about anymore, just because history is played out and the value has accrued towards CPCs and cost per conversion now for modern ad networks.

I think in the sort of digital economy, the closest you can get to a measurable accountable outcome, the more value will accruate your platform. And so going back to your question, we'll competition cause price compression probably, but I think in general, you know, the closer you are to really valuable business outcome, the more your platform will be valued relative to the value of that business outcome, as opposed to being compared to another piece of technology. And so, you know, it's interesting, I'm not sure what outcomes based would be for Zoom because you'd have to describe the value to every single video call you have.

And I'm sure some are quite important when you're, you know, closing a huge deal and some are totally trivial. And that's just not easy. In serious business, we help build AI agents for customer experience and you know your cost per contact in your call center and you know the cost savings that an AI agent could drive, you know, the value of a new product sale and if your AI agent helps make that sale, just like, you know, how much, you know, you pay a salesperson for doing that, you know, how much is valuable it is to your agent.

And as a consequence of being really close to that value, I think it's a really natural way to charge for it. And for companies, it means they can model this not proportional to sort of the cost of a technology, but proportional to the value that they're getting as a business. The thing I think will happen, which is a mix of competition and technology adoption is a lot of AI agents now are being compared to their human counterparts, whether it's labor costs or effectiveness, in a market like software engineering or customer service in area that you know, perhaps like you know, conventional wisdom as AI agents will come to be dominant parts of this industry.

You have to imagine that in 10 years you'll start comparing agents to other agents and then only to a whole sorts of differences, you know, the cost won't be comparing to labor costs, you'll be comparing it to inference costs, but the effectiveness will presumably be different. And I think the thing people often missed are second order effects. So just going back to Sierra's business, I think a lot of people think about AI agents for customer experience and they think call center automation.

And that's true. And you know, the phone call costs $20 today and it costs 20 cents with AI. Wow, that's a great opportunity to recoup operating expense savings. But imagine you run a big telecommunications company and your entire business is based on lifetime value.

And you have some subscribers who are on a higher tier plan for 10 years or some subscribers are on a lower tier plan for one year. Your business is really a function of customer acquisition costs and attrition. And all of a sudden, you know, your $20 phone call went to 20 cents. Are you just going to recoup those costs so you think how many more conversations can I have with my subscribers and actually increase the size of the plan they're on, reduce the likelihood that, you know, they see it out on television and switch to another, you know, mobile phone provider.

And all of a sudden, you realize, wow, that's a lot more important than the operating expense savings I might have gotten from reducing my BPO costs. And I think it will actually change the market. And so in some ways, you could say, you know, will the first or second order facts be price compression? I actually think it will be much more dramatic than that, which is actually what you do with customer engagement will just shift entirely and you'll stop thinking of it as a cost center.

When the price of a phone call starts to approach the price of a page view, you're going to do a lot more of them. And as a consequence, I think it's just going to really up end to the markets. And in particular, I think the way you'll value it is very hard to predict right now. But I think it will go closer towards business outcomes than the cost of the technology.

I guess it wrapped in that. And I don't mean to ask you to speculate about other businesses, because you have a great one that you're running here today. But there is this analogy that I've sort of flipped back and forth in my mind a little bit, which is internet versus mobile of what is AI as an opportunity set, does the outcomes set look more like the internet in that the value captured by big independent standalone companies is larger than that of existing businesses that have leveraged the technology in some way, shape or form versus mobile.

I think we could probably both agree that the biggest beneficiaries of mobile were probably Google with Android, Apple with the App Store, Facebook, probably most of the value that was created was probably in some type of incumbents in some way. And I guess as you think about where there might be net new opportunities or where vectors of value are going to be created, do you think that do you think the same about the internet? The most of the value accrued to Amazon and Google as opposed to it's actually I just haven't done the math on it.

I've not argued with you actually. It's true with the most valuable companies of all time and you know in the top five of the you know SMB 500 and all that. But it's so interesting. I remember the book The Long Tale and all that but it's it's created incredible economy.

So if you took up the top 100 software companies in the stock market, the top five are you know the meta Google, Amazon, etc. Apple, Microsoft. But like the next 40 are like SaaS companies, many of which most people have never heard of unless you're sort of in our business. What is the sum of the long tale?

And I look at like incredible businesses like Shopify as an example and you know Shopify is a beneficiary of that. But there are a lot of businesses on top of yeah. I also give like Patrick at Stripe Taco increasing the GDP of the internet. So I think the long the internet in particular is an extremely long tale and I think it's you know really change the economy in dramatic ways and change distribution mechanics and you know you look at certainly meta TikTok wouldn't exist without the internet and you give credit to the internet or do you prescribe it all there.

So I'm happy to answer your question but just to say I don't know actually how to think about that because every company is a digital company at this point. It's interesting. It's an interesting point and maybe I need to reframe how I ask the question because I think you might be right that the totality of the value created on top of the platform itself dwarfs that. It may actually I'd be interested for someone smarter than me to do that analysis.

I think it does but I don't know that. It's also hard to define. It's hard to define. Is it bank with 60,000 software engineers a software company or bank?

And the HVAC company that can now reach customers in a more meaningful way that grew from one million revenue to 20 million revenue. Who do you give credit to for that stuff? It's interesting but I guess the question I had is there's sort of this I guess the Salesforce and mobile prove to be Salesforce in a lot of ways. It was kind of a continuing at least within that and obviously there's disruption that ended up happening with Uber and taxis or Airbnb and hotels or whatever it is.

I guess as you think about those big software players and you mentioned ServiceNow and SAP obviously you know Salesforce in the ecosystem as well. Do you think that the lion's share of those will be the ones that persist if we picked I don't know the 10 industries and who the whores are not horizontal I guess but like who the application players on there do you think the lion's share of those will survive and be the next generation of it a kind of mobile or do you think we'll look at a lot of disruption and that new companies are going to be who captures ITSM or CRM or ERP or whatever three-letter acronym.

I think there will be disruption but I don't think any one of those will definitely be disrupted. I actually I think it's just going to require a lot of execution. I was joking over Toby at Shopify one time that you know you find a cynical engineer and like are you just a database in the cloud you're like kind of. Yeah I mean I was like look I mean kind of under cells the decade plus work I put into this database of the cloud yeah kind of is if you look at software as a service reductively it is a database in the cloud with a lot of workflows on top and what agents will end up doing is those workflows and so you know I haven't done a lot of work on ERP systems but if you just imagine you know the procurement processes and you know contracting and all the things that sort of make up at them and the Ernst & Young auditor using it to you know audit your financials for a quarterly earnings report how much of that will be AI agents and then what is the value of that platform when the forums and fields and the web browser aren't used very much anymore not nothing I actually think that ledger that you know the the balanced books that you have is actually quite useful so it's not zero and then similarly yeah could the company who made the forums and fields in the web browser and make the agents yeah I could definitely see that.