Gavin Baker: Why AI Demand Is Outrunning Compute Supply

**Gavin Baker** (0:00)
When the history of the 21st century is written, you know, there was like the Victorian age, I think this will be like the age of Mellon and Jensen, because they are fundamentally altering the fabric of human society and civilization.

**David George** (0:11)
What happens if there's like a massive supply shortage?

**Gavin Baker** (0:14)
Every time you've had a real, profound new technology, you get a bubble because the markets get really excited, and they get ahead of themselves, things get overvalued, that overvaluation leads to an overbuild.

**David George** (0:26)
One of the things that I think has been correct, but ineffective, is this idea that we need to stay ahead of China.

**Gavin Baker** (0:32)
You're opposed to data centers. Well, you know what? It's probably the best thing that has ever happened to working class Americans. We are reindustrializing America, and it's awesome.

**David George** (0:41)
Assume that you're right. There's not a physics reason why this can't work.

**Gavin Baker** (0:46)
An increasing fraction of the world's compute is going to be in orbit. This sounds crazy, but asteroid mining is going to be a very real thing. It has more gold, silver, platinum, every precious metal in it that exists in the Earth's crust.

**David George** (1:00)
Every LP conversation that we have starts with like, how's this all going to go wrong?

**SPEAKER_3** (1:04)
Gavin Baker has spent the summer asking AI leaders one question. Can you give me a single quantitative data point in your business that's getting worse?
So far, the answer has been no. In this episode, 816z general partner David George sits down with Gavin to take a fresh look at the economics of the AI boom. They discuss why AI may be a positive some market where from Tier Labs, open source, applications, clouds and chip companies can all win, and what today's compute economics tell us about the sustainability of the build out. They also tackled the bubble question head on. Every major technology shift has produced over investment at some point. But with compute already constrained and AI usage still concentrated among a relatively small number of people, what happens when that demand spreads across the broader economy?
From data centers and reindustrialization to orbital compute, open source and Nvidia, this is a wide-ranging look at what happens if AI demand keeps outrunning supply.

**David George** (2:06)
Gavin, you've been out here hanging out on the West Coast over the summer, and you've been talking about the fact that you're trying to find someone to give you a bearish case to make your sentiment more negative. Have you found anybody?

**Gavin Baker** (2:19)
No, and I ask everyone. My standard question is, can you tell me one quantitative data point in your business that's getting worse? Just one. That's my standard question, and it's at least in July and August, I haven't been able to find a single person. Now, if we're being honest, Anthropic is in a quiet period, so maybe they've slowed down a little bit. But I do think the rest of the world has accelerated. Open AI has clearly accelerated. Open Source, I think, has accelerated more. And then I do think Grok, particularly after Grokbot, has had a pretty dramatic acceleration.
And so AI overall, it accelerated in July, it accelerated in August, and it can't keep accelerating forever, but it's just kind of wild that public stocks have kind of fallen out of bed over the last two months. And I mean, you can drown crossing a river that's on average two feet deep, and so there's not a lot of action at the index level. But some of these AI names are in pretty significant drawdowns, and they bounced a little bit in August, but still pretty big drawdowns, and things are broadly accelerating.
Our friend Eric Fisher did a podcast with Patrick O'Shaughnessy, and he said, maybe everyone wins. Anthropic wins, OpenAI wins, SpaceX wins, Meta wins, Google wins by selling a lot of TPUs, Open Source wins, Neo Clouds win, the inference clouds win on top of the Neo Clouds.

**David George** (3:49)
Applications win.

**Gavin Baker** (3:50)
Yeah, maybe not all applications. Applications that I think execute well and navigate this. But that feels like a very possible scenario to me, and there's so much zero-sum thinking in the world. And by the way, on Anthropic, what is...
My hypothesis would be, if you're Anthropic, one, I think they probably trued up and cleaned up some accounting.

**David George** (4:16)
Yes, definitely.

**Gavin Baker** (4:17)
You'd rather do that.

**David George** (4:18)
Yes.

**Gavin Baker** (4:19)
So you re-based, and now you're comparable to OpenAI.

**David George** (4:22)
Yeah, in terms of revenue added, in terms of the definition, and now I think kind of revenue added.