Chapter 1: What are vertical AI applications and why are they important?
So Nick, you've been investing across your career in AI, fintech, defense, wealth management. Tell me about what you're most excited about today.
I'm most excited about vertical AI applications. I think the first inning of AI innovation, we've seen broad horizontal platforms, the big LLM labs achieve extraordinary things, and they're starting to shift their focus from just providing an LLM to getting into horizontal applications. I think some of the most interesting investments are going to be in vertical AI applications.
And the reason I think vertical is so interesting is twofold. One is more defensible. It's very difficult for those horizontal platforms to get access to all the workflow and data in a vertical application. And many of the vertical application incumbents and major customers are very reluctant to give their data to these AI labs.
But the second and maybe the more interesting reason is when you look what drives AI performance, it's context. So general intelligence is interestingly getting commoditized. But when you apply that intelligence to a particular vertical where you've got really rich idiosyncratic data,
Chapter 2: How does context drive AI performance in vertical applications?
context the performance can go through the roof and i sometimes get upset with my lms because i ask the l on the question gives me an answer two months later i realized that it was the wrong context or i didn't ask the right question there's a contra there's a counter thesis to what you're saying which is that the horizontal llms will disrupt the vertical application of AI?
Does it really come down to the proprietary information? Is there more to it? Why won't the large LM players disrupt the vertical AI players?
It's a few things. I think first, they've got a lot to do. They've got a lot on their plate already in this sort of commoditization struggle. They're all investing a lot to try to get incremental improvements in their core models better. And They can't devote all their attention to trying to win every application category they can. They'll go after a few of them.
They'll go after the biggest ones. I think it's very similar to what happened with Google and Microsoft as they extended their search and operating system franchises into horizontal productivity apps. Very profitable for both companies. They're both very good at it. And we use those applications today. They didn't do everything. And they tried to do some things and weren't successful at them.
I think it'll be similar for LLMs. They'll nail some horizontal applications. You can see OpenAI experimenting with planning travel for you or helping you with e-commerce. You can see Anthropic experimenting with business agents. And coding, of course, has been a very attractive area for both companies. But they can't do everything.
And you've invested in terms of the largest players more in the wealth management tech than really any VC that I know. What makes you so bullish on that sector of the market?
When I look at wealth management more broadly, I think there are two kind of structural problems that lead to a lot of opportunities. One structural problem is is the current technology in the industry is terrible. If you were to ask any financial advisor, hey, how much do you like your custodian or these different point solutions, they'd tell you they were very unhappy.
So what's happened is financial advisors have to work on legacy custody platforms, primarily Schwab, Fidelity, and Pershing that were developed 20 years ago. They use batch processing, very limited APIs, just technology you would have expected in the 1990s. On top of that, they have to cobble together all these expensive point solutions.
And it means that they spend so much of their time in operations, getting their tech working rather than with customers or growing their businesses. So terrible tech in the industry. The second and interestingly related structural problem is how profitable wealth management is. So I think, as you know, small RIAs have profit margins in the sort of 30 to 35% range.
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Chapter 3: Why are large language models unlikely to disrupt vertical AI players?
The context is critical, and so often it comes out of the dialogues and relationship that people have with an advisor.
One of the biggest trends in alternatives, if not the biggest trend, is the rise of retail, expected almost as large as the entire institutional market. I've had the CEO of iCapital, Lawrence Kalkana. I've had the CEO of Hamilton Lane talk about these.
Is there a world where these wealth tech platforms allow the RIAs to access smaller funds, not just the Blackstone Apollo TPGs, but really the smaller funds in the market? And if so, how do you marry wealth tech with the rise of alternatives in retail?
It's coming very fast. That possibility will absolutely come to pass. And it's interesting. I know the people driving sort of the alts revolution well. I used to work with Lawrence Calcano at Goldman Sachs a long time ago. This is something that customers want and customers demand and that increasingly funds are able to provide. So I think we'll see a lot more of that.
I do think, though, that just because I come from this world, it's worth saying that The most attractive funds don't want to have retail, like small venture funds in particular, really don't want to have retail investors. It just adds a lot of regulatory oversight and hassle. We've got a great business working with a limited number of really sophisticated institutional clients.
We're not playing an asset accumulation game. We're playing a performance game. So I don't think it applies across the board, but to clients that are looking for more assets that are willing to take on those responsibilities, a lot more is coming.
Is there more tooling coming down the path in addition to platforms like iCapital? What would be your advice for a GP that is looking to raise from retail?
There are more tools coming. I think it's interesting. I don't think tools alone will be able to solve the problem for funds. I think intermediaries like iCapital are going to be very important to help consumers invest in these areas and help funds get on these platforms.
One of the other large trends in asset management, specifically on the taxable side, is tax aware strategies. And you see a lot of wealth tech going after that space in many different ways. What's the future of tax aware investing look like for the retail channel and for the non-institutional investor?
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Chapter 4: What structural problems exist in the wealth management industry?
And so I think in legal tech, there'll be a litigation winner. There'll be a general purpose tool winner. There'll be specific winners in other areas where expertise is required. International tax law is a vastly profitable part of the legal world. And I don't think the existing players are focused on that today, but that requires a lot of financial knowledge as well.
So many parts of legal yet to be enhanced with AI and lots of opportunity.
I think it's good to have some skepticism as a lawyer looking at legal tech, but the reality is that the majority of legal opportunity is not pursued because the cost of discovery and the cost of even figuring out whether you should do something is relatively high. It might cost $25,000 to figure out whether you have a $200,000 opportunity suit.
And although it sounds rational to do that, 90% of the people won't do that. They have that downside risk aversion that keeps them from pursuing. So actually legal tech, in my opinion, is going to significantly increase the number of legal opportunity because there's much more things that are not being pursued.
I think you're right. And I think AI is going to help in other areas like arbitration, where you can get very quick responses, quick settlements, and just make the overall legal system much more efficient.
When I found out you were on the Council of Foreign Relations on the board of directors, I was very excited. One of the most famous think tanks in Washington, specifically dealing with foreign policy, which is chaired by David Rubenstein, co-founder of Carlyle. You have a very unique vantage point on that board.
What do you see as the future of defense and the future of national security for the United States?
These are areas I've spent a lot of time thinking about, and it's interesting.
These areas have brought together both my work with the council and other think tanks on defense intelligence and foreign policy generally, but also my work in the venture capital world where I've invested in a variety of companies that serve those customers and struggle through all of the ridiculous hoops that are put in their way. It's very difficult to work with the government.
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Chapter 5: How does profitability impact innovation in wealth management?
So you have almost this last generation of technology battling out the next generation of technology. What is the United States doing in order to evolve their defense tech for next generation warfare?
It's interesting. So on counter drones specifically, there are a lot of approaches that are being experimented with. both sort of in the lab, so to speak, and on the ground in Ukraine, like working with Ukraine. But I think generally there is a part of the military revolution that we are not currently well-suited to execute on, and that's low-cost hardware.
You know, if you look at the margin structure in the business model of traditional defense primes, it's cost plus. They charge a very large amount for their hardware systems. And they bundle services with these systems, whether it's an aircraft, a radar system, whatever it is, a ship. But the action going forward is going to be in a lot of these low-cost systems.
And they don't see enough margin for that to fit their current business models. One might say their business models have to change. I think more likely you're going to get new players.
like and roll and they're going to be others that are able to make great businesses around doing that really really well and it's interesting if you look at how much we spend on defense i think we could spend you know half of that and have it be more effective because so much the money is wasted in these huge exquisite contracts that have lots and lots of maintenance costs and
You know, it's interesting if you look as a subset of that and how software is developed in the Department of Defense and intelligence agencies, it's often by companies that aren't really software companies and they throw lots of bodies at the problem. And you get this custom code by people who aren't, you know, the kind of software talent that Silicon Valley runs on.
And I don't think our country is best served by that.
You mentioned cost plus. Not only is there no incentive to lower the cost, there's a disincentive because oftentimes this cost is a percentage, not a dollar sum. So it's not like if they lowered the cost by 10 times, they would make the same amount of money, which doesn't really matter. They actually make less money.
Absolutely. And if you look at the major systems that have been driven by cost plus, their cost keeps going up and up and up and up. There's a joke in the military that eventually all military spending will go into one airplane. I don't know if it's the F-94, but just the cost of aircraft, the F-35 was so incredibly over budget. And we can't afford to have that type of
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