Acquired - Nvidia Part I- The GPU Company (1993-2006)

0:10Welcome to season 10 episode 5 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund PSL Ventures.

0:46in San Francisco. And we are your hosts. It is the eighth largest company in the world by market cap. When Nvidia began in 1993, it made computer graphics chips in a brutally competitive and low margin market. There were 90 undifferentiated competitors all doing basically the same thing at the same time. And yet today, they have an 83% market share.

1:12of standalone GPUs that's graphics processing units for those of you starting with us from square one that are supplied for desktop and laptop computers. And you're telling like the whole story here. Sorry, sorry, I'll just I'll tease a few things here. So not only that, but of course followers of Nvidia know that they recently pioneered a completely new market, the hardware and software development tools.

1:37to power machine learning, neural networks, deep learning, all of this in the cloud in the data center, which obviously is proving to define this whole decade of computing. And as David and I began our research, we realized this really could be a book and like a thriller of a book since the co-founder and CEO, Jensen Huang, really has bet the company, like the whole company, three separate times, nearly going bankrupt each time. But obviously, as we reflect back here today, that certainly did not happen.

2:07All right, so here's everything you need to know about Jensen. The Cliffs notes before we talk for like six hours about him. The dude used to drive a Toyota Supra, like a fast and furious style, like a death machine. And he almost died. He got it like a huge accident. Just one more way he is like Elon Musk. Oh, man, crazy.

2:28Well, because we have way too much here for one episode, we'll save the stories on machine learning for next time. Today we are going to tell the wild story of NVIDIA's founding to its rise in prominence, powering the computer graphics and gaming revolution. This really is a story of true invention and innovation. It reminds you that engineering breakthroughs really do push our world forward.

2:52In saying that just kind of set some context, this is a story that takes place from about 1993 to kind of the mid to late 2000s and as hyped as Nvidia has been, you know, over the last five years, obviously with the stock run up and everyone's excitement around the company, I think Jensen is still an underrated CEO, even rated where the Nvidia bulls have put him. I think Jensen is one of those people where like, If you know about him, you know what we're talking about, and you have unbelievable reverence. But I think not enough people really know. Just one more dancing quote before we get into the episode is best. My will to survive exceeds almost everybody else's will to kill me. Amazing. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora.

3:49the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

4:18They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

4:37Lagora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:50And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test

5:43Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm, or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. Listeners, after you finish this episode, And you're thinking to yourself, gosh, I wish I could talk about this with people. We have good news for you. You can do that with 11,000 other smart members of the acquired community at acquired.fm slash slack. Here's a new thing. If you haven't rated or reviewed this podcast yet, I think the last time we mentioned this was like years ago, Spotify in their mobile app just added the ability to rate. So if you listen and Spotify, you should totally.

6:32Leave us a little rating in there if you're on Apple Podcasts. Leave us a review. We really, really, really appreciate it when you help share your experience as a listener with others. All right, listeners, this is not financial advice. We may hold positions in things we discuss on this show. This is for entertainment and informational purposes only. And David, take us in. So we start in February of 1963.

7:01What's going on in Silicon Valley in 1963? Let's see, Fairchild had already started, I think. Silicon Valley was like underway, but it was early days. But we start not in Silicon Valley, but in Taiwan. Yes, in the southern part of the island of Taiwan, with the birth of Jen Sun Huang, later Americanized to Jensen, Jensen Huang. So his dad...

7:30was an engineer for the air conditioning company carrier. Oh yeah. Yeah, you see those big industrial air conditioning units on buildings and stuff. And when Jensen is four, his dad goes on a company training to America to New York City. And he was like, wow, you know, this is amazing. I want my kids to grow up here and to have all the opportunities that are available.

7:59So he comes home, Jensen's four, Jensen has an older brother who's a couple of years older. Nobody speaks English, so his mom gets an English dictionary and picks 10 words every day, grills the two kids like quizzes them, and teaches them English out of the dictionary. Now if you listen to Jensen, where is that accent come from? Because it's not what you would think. The family ends up moving to Thailand a few years later, and then when they're living in Thailand and Jensen is nine, They finally decide that this is the right time to send the kids to America. Now that the parents can't move to America yet, they don't have enough money, but they found a boarding school in America that is cheap enough that they can afford. It is called Anita Baptist Institute, and it is in Eastern Kentucky, the sticks of Kentucky. Gents would later say that he and his brother were the first foreigners to attend this school, and they're pretty sure they were the first Chinese people

8:56ever in the town of Anita. Well, it turns out that the reason that this school, OBI, Anita Baptist Institute was so cheap, was it's actually not a prep school. It's a reform school. So this is a school for like troubled kids. It's a reform school. So Jensen's roommate, when he shows up as a nine year old, is a 17 year old kid who had just gotten out of prison and was recovering from seven stab wounds that he got in a knife fight. Classic American journey right here. And, basically, this is so Jensen. Like, they become great friends, even though this kid is eight years older than him, like, twice his age, basically, from a way different background. Jensen helps him with math, and he gets Jensen into weightlifting. So, you see Jensen today, and you're like, that dude is jacked. He is jacked. He's been weightlifting since he was nine years old.

9:52He says about his time in Anita. You know, now I don't get scared very often. I don't worry about going places I haven't gone before. I can tolerate a lot of discomfort. Boy does that play out in his life as we will see. So it's pretty awesome actually now. He and his wife Lori have given a few million dollars to the school and it's like a amazing institution. Now you can see Jensen gave the commencement address in 2020. We're gonna link to this in the sources. It's pretty awesome.

10:21So after a couple years at OBI, his parents are finally able to save up enough money to afford to come to the US themselves. So they move first to Tacoma Washington, the great state of Washington, and then they move a little farther south down to the suburbs of Portland, Oregon. Jensen and his brother go home, they live with them, they go to public school there. Jensen continues his He's an American upbringing. He gets really into table tennis. He places third in the junior nationals in table tennis and he gets his picture in sports illustrated. No, no way. Pretty amazing. But his parents continue their sort of like academic discipline and Jetson's super smart obviously. He ends up skipping two grades and then going to college, he goes to in state, college he goes to Oregon State University just down there a little bit. And he got there when he was like 16, right?

11:16he got there when he was 16 because he had skipped a couple of greats and he loves math so he decides he's going to major in electrical engineering at OSU and he totally falls in love in more ways than one the first way that he falls in love is he just thinks like electrical engineering is the coolest thing in the world becomes one of the top students in the school he talks about how like he gets mad at the professors because they don't use enough precision when talking about exact numbers. Which he later comes to say that he respects the opposite position. I think some of the NVIDIA employees call it CEO math when he sort of rounds all the numbers and he's reflecting back, I do understand what the professors were trying to show is the details only matter if you understand the big picture first. That's so gentle. He understands.

12:08Yeah, my employees get mad at me when I, you know, round the numbers and you see your math. Like I get it. Like I appreciate precision too. But, you know, like the big picture is what matters here. The second way he falls in love is with his lab partner in electrical engineering fundamentals, his lab partner, Laurie, who goes on to become his wife. Such a cool story. So he graduates in 1984. She graduates in 1985. They moved down to Silicon Valley and Jensen.

12:37joins AMD as a sort of equivalent of like chip design PM. It's very like engineering heavy, but he's kind of like a PM. He's sort of like helping as a junior manager of a of a process for developing a chip. He's working on a then blazing fast one megahertz CPU chip.

12:58Yeah, he talks about this and he says, you know, he's talking about how slow one megahertz is and he refers to it and says, you could even see it coming. It's about how fast it was. You could see it coming from a long way away and still coming and still coming. Amazing. And of course, now he makes literally the fastest chips in the entire world. So he starts at AMD. He starts at night working on a master's degree in electrical engineering at Stanford.

13:25It ultimately takes him eight years to finish this master's. He works all the time that he's at AMD and then at LSI Logic where he goes to we're talking about in a sec. He ultimately does graduate right before they start in video. This is like a super cool bit of trivia. Did you go back and watch the Don Valentine view from the top? No, I didn't lecture at GSP. I watched that like once a year every year. Every time there's an excuse. Is that the one where he holds up Alfred's resume? Yeah, he holds up Alfred's resume. So also.

13:54Easter egg in that talk. That was the day that the Jensen and Lori Wang Engineering Center at Stanford was dedicated it as Dan says. Jensen did a building. Pretty awesome. I did watch. He gives a talk where he walks in and gives a talk at Stanford. I think it's the first time that Jensen has given a talk since the building opened. And he says, I've donated. We have this nice building now. So I have no more money.

14:21Yeah, I'm penniless. Right, right. That's so great. Just to set context for people, if you look at his Nvidia shares, he's worth about $20 billion right now. I think he owns what like three and a half percent of Nvidia is something like that. Yeah, he's not penniless. Okay, so he works at AMD for a couple of years. And while he's working there, probably from working on this chip that you can so fast, you can really see it coming. He realizes that designing chips is really freaking hard.

14:50Intel can do it, AMD can do it, but there's not many companies. It's all full stack at this time. TSMC doesn't start till 1987. Not only are you manufacturing in-house, but for the most part, the process of designing a chip is a manual one. These companies each have their own institutionalized internal way of working that you design and lay out the elements of a chip. And Jensen talks about when he was in school the reason he wanted to go to AMD was he thought this was so cool that like you could do it all and then once he's actually at AMD's like he realizes like it's actually not cool like it would be cooler if you could be really good at like a certain part of the stack and have tools and platforms and other companies to allow you to allow anybody to make chips yeah there were like design tools to help you make chips so after a couple years his office me at AMD

15:48leaves and goes to join a startup called LSI Logic, which had just gotten public. And we've talked about it on the show, made Don Valentine and Sequoia, the then largest venture return in an IPO in history. Maybe the largest venture return ever in history when they went public of $153 million on day one.

16:15Boy has venture changed as an asset class. But that, I'm trying to think that fund, that probably would have been, I don't know, Sequoia fund two or three, maybe. I mean, I bet the fund was like, I don't know, 10, 15 million like, so it probably roughly 10X the fund in one day. Right. Pretty awesome. So what was LSI? It was one of the first and was sort of the premier A6 company.

16:43I see application-specific integrated circuit companies. What they did and what that meant was they basically made custom design chips for other companies. It's what Jensen's thinking about. The custom design chips that they would make these ASICs would be like for a very, very specific function that would be integrated into other systems.

17:06Defense companies, Lockheed Martin and the like, but lots of other companies now too are coming to LSA Logic and the other A6 companies and saying, hey, we want to create these systems of chips. You help us design the chips to go into these systems and yeah, we'll use processors from Intel too, but like it really helps democratize making end product systems. Right. And the idea with A6 is really if...

17:32You're not saying hey, there's gonna be a general purpose computer that this needs to power that can you know be super flexible and people might have all kinds of applications that run on it but you know more inefficient in order to get that flexibility chip Hey, I know the exact thing that this chip will do when it will only ever do this and so we can actually Literally hard code that right on the chip. I mean that the actual design of the physical chip can be for this one specific thing, so it's super efficient at this one low-level thing. Yep, and the legacy of ASICs today, still around, still used by ASICs, but the legacy is FPGAs, feel programmable, array chips that are, you know, some might say sort of a bear case for Nvidia these days, but we will, we will get to that far, far, far down the road. Sun, micro systems was one of their biggest.

18:27customers, and that was how son got started and made the chips for their workstations. And in fact, Jensen, when he shows up at LSI, son is like just starting and coming to LSI. And so he gets put on the project. He basically embeds with son, like in the early days of Sun Microsystems, to help them build out the chips for what would ultimately become the Spark Station 1. Son's first big workstation product.

18:54Over the next few years, he pretty much exclusively works with Sun while he's at LSI Logic. He works directly with Andy Bechtelstein, who you know, the founder of Sun and with Benot Coslo. Yeah. He becomes super well-known and develops quite a reputation there as somebody who can really like take these visions for chips and these customer requirements from Sun and turn it into, you know, reality and production. So, one day.

19:23right around Thanksgiving, 1992. Jensen has finally, after eight years, finished his master's degree at Stanford, and Stanford is quite, quite glad that he finished before this happens. Two of Jensen's buddies who he's become close with at Sun, Chris Malachowski and Curtis Prem, who in Jensen's own words, he describes them as really, really fantastic engineers, and when Jensen says that, he means it.

19:50They come to Jensen and they're like, we're not like super happy at Sun, the two of us. We have an idea that we want to talk to you about. And Jensen's like, well, sure, let's go meet at my favorite spot, Denny's. Really? Yeah, like the man loves Denny's. He worked at Denny's in high school. Like he's always going to Denny's. He orders the super bird, I think, is like his go-to dish. Nice. He's so foxy. I love him. So they go all have dinner at Denny's and Chris and Curtis pitch him on their idea.

20:18Which their idea is it's pretty good. It's pretty good. Tell me as a venture capitalist if you would fund this idea back then in late 1992, so they see 3D graphics are Really becoming a thing and you know remember this is the era of Sun now. It's logic all this stuff It's also the era of Silicon graphics right down the street right there in Silicon Valley SGI So many great things that come out of there. You know Jim Clark Netscape like all this great stuff Jurassic Park Jurassic Park is about to come out, comes out in 1993. So there's this huge demand for 3D graphics. The way 3D graphics are done, you need SGI workstations, you need like super custom, you know, very high-end, very expensive stuff. Only something with the budget of like either the military or like a Jurassic Park can afford to do this, but people love it, like the consumers.

21:13Love 3D graphics. Not to mention, where are we in the evolution of video game consoles at this point? Well, we're still in the Super Nintendo days, so we're not at 3D console graphics yet. That's coming very shortly. But what is happening is the PC wave is like really cresting right now, like we're like a year and a half from Windows 95 coming out. And I remember doing this, I bet you do too.

21:41order kids in 1992, 1993 doing on their PCs. They're playing Wolfenstein 3D and Doom comes out in 1993. These are taken the world by storm and they're made by it in software in Texas and John Carmack and John Romero. But Carmack is like doing incredible feats of engineering to get 3D graphics to run on consumer PCs. It took somebody of Carmack's caliber to make this happen.

22:11And the market loved it. So the idea that Chris and Curtis had, so they're like, we're really great chip engineers. Jensen, you're a really great chip PM essentially. Let's make a graphics card. Let's make a chip that can accelerate the graphics of a normal PC to enable 3D graphics like SGI is doing with professional workstations to enable them for consumer hardware PCs. We know that people love games, this will help the entire industry, you know, take off. And you're not even saying that they're going to try and make it so you can develop games on a PC. You're saying like just so you can play games on a PC, right? Well, both. I mean, mostly that you can play games on the PC, but then you're also going to have to create, you know, all the APIs and SDKs and developer ecosystem for developers to

23:08Access this new hardware on PCs, but they'll just develop on PCs. It's really about getting the like the hardware into consumers hands that they can actually play this stuff. All right. So what do you think? It's just like a good pitch. I mean, so what you're basically asking me to believe 1990 to me is that video games on PCs are going to be a thing that there's going to be a big economic wave around that lots of consumers are going to want to do this. They're going to want to do it on PCs instead of on Super Nintendo and dedicated systems. Maybe. Well, I have this proof point of its software and Wolfenstein and Doom right there. Like millions of people doing this. But still maybe because it's not clear that like video games are going to be a giant market. It could be like a kid market, you know, and it could be the case that like, do you really need?

24:03to totally change the development environment or can like there be like five or six different dooms out there. There's five or six carmacks who are all independently geniuses and can figure out how to do all the graphics on their own. Yeah, maybe, but there's a leap of faith. Yeah, but definitely a leap of faith. So yeah, okay, not totally obvious. But still, I think this was pretty fundable, I think, at this moment in time. And the other thing that was going on was in Silicon Valley, these peripheral companies, like people building chips and cards that plug into consumers PCs. This was full swing. Their companies make in sound cards, their companies making networking cards, their companies making serial port cards like God knows what. Okay, so there's already like sort of an accelerated computing wave here where people are saying like there's some reason to do something specialized off the CPU that needs its own

24:57integrated circuit that vendors are making custom and there's a market to make custom stuff as a vendor for PCs that takes a workload off the CPU. Yeah, and so the pitch is we're going to make a custom graphics card. Take a graphics workload off the CPU specifically for gaming. Great. Okay. So yeah, it was pretty much a brain dead yes, but as you alluded to at the top of the show, the problem when something is a brain dead yes for a venture capitalist.

25:27is that it's a brain dead yes for lots of venture capitalists and lots and lots and lots of companies get funded to do this. But back to Denny's, that night, Nvidia is the first. They are the first dedicated graphics card company. They all decide the three of them that they're going to go in on this. Jensen goes to the CEO of LSI Logic.

25:56walks into his office and tells him that he's going to resign. He's going to go start this company with two engineers from Sun, and this is what the business plan is going to be. Now, do you know who the CEO of LSI Logic was? No. It was a man named Wilf Corrigan who was previously the CEO of Fairchild Semiconductor. No way. Damn right. So is that how, because Don Valentine obviously was the biggest Investor in what Sequoia was in allosilogic and he did he know him from Fairchild. Yeah, they were colleagues back in the day. Okay. And then the biggest exit in Sequoia's history to that point in time. So Wilf says, so let me get this straight and he says to Jensen, you're going to go build these graphics cards and kind of just like you were saying they're been, who's going to use these and what for? It's like, well, you know, you're going to be in PCs. They're for gaming. They're for a bunch of kids.

26:53and Welfth owns it on the critical question. He's like, well, who makes PC games? Is there a developer ecosystem for this? So that's kind of like, we think if we build it, they'll come. So Welfth says, remember, he was a fair child. He's out like, he does, when to make silicon for specific applications. And Welfth says, all right, you'll be back. I'm going to hold your desk. But in the meantime, before you go, I'm going to call up done.

27:21I'm going to do it. You've done good work for me. I want to call up Don. He calls up Don and he's like, Don, I got a kid. He's going to come see you. Stand by. Which this is a lesson for all founders and aspiring founders out there. Getting a reference from the CEO of a portfolio company is a really good way to come in.

27:43with a venture capital that's already leaning toward investing, especially if you're referred by the top performing company of all time in their portfolio. Yes. It's kind of hard for Jensen to mess up this pitch with the recommendation that he's coming in with. It's literally impossible because he goes to see Don. You know, Don, you know, Don sits down and he's like, so and Jensen completely botches the pitch. He gets like really nervous. At this point, I think he had like a partially written business plan that he had like bought a book on like how to start a business and was like three chapters into the book but decided not to finish and started writing the plan to finish the plan. So he comes into this meeting and just kind of like barfs all over Don. Yes, exactly. So Jensen's walking out the door. He's like, you know, totally dejected. Don stops him and says, well, that wasn't very good.

28:43but Wilf says to give you money. So against my best judgment, based on what you just told me, I'm gonna give you money. But if you lose my money, I'll kill you. Classic, classic deadline. So good. So the deal happens. Sutter Hill comes in too, because again, like it listens all dramatizing the end of the day, like this is a hot deal.

29:11Two episodes in a row for us with Sutter Hill. I know. OG's they're so good, but it was a hot deal. They wanted it and this fits central casting of at this point in time. They invested like a million each. Is that right for a total of two? So $2 million total round. I don't know who invested what. I assume a million each, but $2 million total round at a $6 million post money valuation. Remember everybody.

29:39This is the eighth most valuable company in the world right now. Started at a six million dollar post-money valuation. So they're getting things ironed out and there's just one problem. They don't have a name for the company yet. Jensen and Chris and Curtis, they've just been working on this, working on the business plan, but they don't have a name. They need to incorporate the company and they were saving the files that they were working on for the chip design for the first graphics chip as .nv.

30:08NV being short for next version. And so like, oh, we kind of like that. You know, we're always working on the next version here. They start looking around in the dictionary for words that have NV in them. It's probably a very short list. And they find the Latin word in video, i-n-v-i-d-i-a, which means NV. And they're like, great. We'll be the NV of the industry in video. We'll drop the i at the beginning. So we start with NV. This is awesome.

30:37Of course they pick green so later on they can have that marketing campaign of green with envy Careful what you wish for here though because again as we've been saying literally 89 other companies get funded within a couple months to go do the same thing It's a very clever name also the notion of like vid being in there that it's sort of video And that that's another thing that they want to do like it's the classic rich Barton empty vessel name, you know There's enough things that it could mean and we're gonna fill it with with meaning because they're doing a thing here They're like well 89 other people are also sort of simultaneously doing it is Kind of a new frontier that they need to invent and then own Like thought leadership in that area and they do need to kind of like

31:25quickly build a brand not only with consumers but with PC manufacturers. Jensen the way he sort of describes it is that their vision, although he doesn't like the word vision because he thinks it's exclusionary to people. So he said our perspective is that they want to enable graphics to be a new medium to tell stories. And here's sort of like the way that he articulates at the time why video games today are $180 billion a year industry bigger than Hollywood bigger than music it's the biggest entertainment medium but at the time he sort of has this thesis that like you really can't through computer graphics tell stories today but if you could it's Really interesting because it's not pre-recorded so it can be sort of new and different every single time you enjoy it

32:14It's also the only medium of entertainment that can be networked, and so therefore it's the only one that can really be like social and interactive. And so our reason for being is to create 3D graphics as a form of artistic storytelling for the future and everything will be in service of that. And I think that's not really what they are today necessarily. It's a piece of what they are today, but that kept them going for the first 20 years their existence.

32:43and baked into that is again, you know, will kind of like hit on it and you did too to your credit. You're a very good venture capitalist. You hit on really the key problem with this first iteration of Nvidia, which is they have to go evangelize to developers to like, yeah, there's it and there's Carmack out there. But like, not a whole lot of other PC game developers out there. Not a whole lot of other 3D.

33:10PC game developers. At this time, there are 2D PC game developers, but they got to convince a whole lot of people to go learn how to do 3D game development for PCs. And that's like, we're going to enable storytelling all of them. So to do that, they have to go right their own APIs and SDK and development framework to develop for this new graphics chip that they come out. And they have to make a whole bunch of technical design decisions that they want the industry to standardize on. Right.

33:39This is a case study of what happens when you get more clever than the rest of the industry. Exactly. So at first, things start off really well. Remember this super hot, the first company they're funded by Sequoia and Sutter Hill, they land a big deal with Sega to power their arcade consoles and their next generation home console to be the 3D graphics engine.

34:06and would ultimately become the Sega Saturn. And as we know from our Sony episode, not quite the Sega Genesis. Not quite the Sega Genesis. Well, so the problem is, so in video and Sega they're working together, they make a bunch of these design decisions, the biggest of which is they decide that the way they're going to create, you know, people probably know you create 3D graphics, you use polygons, that's why people are always talking about polygons in this industry, they have to decide on a sort of primitive for the polygon. They're like, oh, what will you use?

34:34Quadrilaterals for vertex, you know, and anybody who knows anything about video game development now is like, that's not how it's done. I'm pretty sure people talk about triangles. Yeah, and I'm pretty sure if you look at Nvidia's amazing headquarters building today, it's made out of triangles in homage to game developers, not quadrilaterals. So, this becomes a pretty big problem.

34:58You know, things go along for a while. It's like fine for about a year and videos leading. They got this big Sega deal. There's not a reason to need standards yet, right? The industry isn't complex enough yet to necessitate a whole bunch of collaboration and set of tools that everyone standardizes on using. You're like, okay, well, we're just gonna put this chip in our game console, ship the game console. We're the only people that, you know, make an SDK, we being Sega. So everyone will have to kind of standardize on this thing anyway. So great.

35:27But obviously, the ecosystem gets much more complex, much more quickly, and it sure would be nice to have some kind of compatibility. Well, here's what happens. So, you know, Curtis and Chris and Jensen, they weren't the only people in Silicon Valley that saw that kids want to play games on PCs with Doom. Microsoft is like, oh, that's interesting. We like selling PCs.

35:55Cast their all these graphics cards companies out there now that are doing this and, you know, what do we do as Microsoft? We really want to encourage this in the ecosystem. Well, we create standards. We would love it if Windows developers could be able to easily develop for all these new machines shipping with all these advanced graphics capabilities. Let's make that as easy as possible for those developers. Yeah, you know, developers want to do 3D graphics directly into Windows without any of this, you know.

36:23Crafty middleware from some no-name company, you know, Nvidia out there. Why don't we just bake these API's right into Windows? Directly for 3D graphics. We'll call it Direct 3D. And of course, anybody who knows about the history of this, that becomes DirectX. DirectX made some pretty different design decisions than Nvidia had made. Is that right? Yeah. So they use triangles. Because triangles makes sense. So now Nvidia's...

36:49Really have a creek, like all of their, you know, the 89 other competitors out there that started later. Most of them are like, sure, I'm gonna jump on board of this Microsoft ecosystem. Like, I would be dumb not to. It's standardized on this completely different paradigm than Nvidia. And then Sega, you know, they've got Sega. They've got this one sort of customer. And then in 1996, Sega's like, yeah.

37:17We're not so sure about this quadrilaterals thing either. And just so that this doesn't feel arbitrary why we're talking about this. And we're going to say at a super high level on three graphics here rather than really going into the weeds. But a triangle is the fewest vertices in a shape that you can have while still creating a two dimensional shape. And so it serves as a basic building block where Assuming you can draw enough triangles and make the triangles small enough, you can form any other shape, any other curved surface. It's sort of the most fundamental building block that you could use to create something that is perceived as 3D. Yep. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year, an audit or a static PDF, then everyone would not, and you're done.

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39:42Nvidia at this point, they're halfway down the road of developing the next chip that they think Sega is going to adopt for what ultimately would become the Dreamcast. Nvidia was calling the NV2 when Sega comes back and says, we're switching horses, we're not going to do this. So they're screwed. For so many reasons, everything we've discussed, there's also in the interim year and a half since Nvidia started, the price of memory dropped because Thank you more law so Nvidia's chips were designed to be like super super tight on memory and the memory cost about two hundred dollars in component you know parts to go into their chips their competitors have more memory that's costing them like fifty dollars and that was just in that one iteration so it's interesting to note that Nvidia by being first

40:35and not projecting out the exponential change that would come from Moore's law was actually a disadvantage because they didn't get a chance to watch and see where the standards were adopted and so they sort of like picked their own lane and went off in their own direction which ended up not being what everyone else picked which put them into disadvantage but second of all everyone else's cost structure was way lower or at least everyone else could see that the cost structure was getting way lower and so Nvidia sort of designed for a constraint that was no longer true by the time everyone else came out with their stuff. At this point, Jensen and his co-founders kind of had to look at each other and say, okay, do we scrap everything we did? And if so, how do we not make this mistake again? How do we make sure that in future generations, we sort of premeditate the exponential curve of Moore's law and prices coming down and design for things that are two, three, four generations?

41:30beyond what we actually have available to hardware right now. So when all this goes down, the company has about nine months of runway left. And like literally anybody else, like you pull the plug, like it's over, like everything in the deck is stacked against you. Like, you're aft. And I can't imagine sitting there dreaming up away out of this. But Jensen, God, he's such a G. He's like, No, we're not going out like this. You know, when you hear Jensen talk today about like Nvidia's culture, he says that intellectual honesty is like the cornerstone of Nvidia's culture. Like, this is what he's freaking talking about. Like, he sits down with Curtis and Chris. And remember there, like they're engineers and they've recruited Nvidia 100 plus engineers into the company at this point and sold them on.

42:22this technological vision of we're going to define the industry we set the standards like we're not going to use some you know off the shelf stuff and like it's all toasting so jensen's like guys like this is a pipe dream we need to throw it all out if we're going to survive the only thing we can do is standard eyes on on the same Microsoft you know direct 3d as everyone else same architecture and our only shot is just to like compete on performance and try and become like the best chip out there in this now sea of commodity chips and you know his co-founders like don't want to do this. This is not an exciting vision for a Silicon Valley engineer. When your CEO comes to you and says that what they're basically saying is

43:10Look, if my job was strategy and your job is execution, the strategy failed and so we just now need to literally out-engineer all of our competitors. We need to be smarter at engineering decisions so we can be more performant at a lower price point using less energy than our competitors because Microsoft, being Microsoft, had all the developer attention and because Microsoft said a standard, Nvidia realized look we have no ability to uniquely get our own developers at least at that point in the company's history and so we must just on our left look and see all the developers are coming from Microsoft using this API on our right is all the same consumers and we have to compete just head to head on raw engineering ability with everyone else will you sing engineering ability but remember like this is essentially a commodity at this point so

44:02Really, it's not just engineering ability, it's how fast can you ship? Like, how fast can you design the next generation of chip, and can you ship it before everybody else? Because everybody knows what's gonna be in that ship. And why is it, what fundamentally was it about graphics cards that made it a commodity? Well, at this point, like all the other peripherals, and we're gonna get into this in a sec, there was nothing that special about it.

44:29They all did the same thing, which was take polygon level 3D graphics processing out of the CPU and onto this other chip on the motherboard. Just like sound cards were doing the same thing for sound, just like networking cards were doing the same thing for networking. And it was just like, what's the price performance ratio of doing that? The interfaces and the programming language. That's all standardized by Microsoft. You're just commodity hardware.

44:57And so what GPUs actually do or did at least in this point in time is say, okay, the system is going to feed me in basically point clouds like vertexes that make polygons that represent like a 3D world. And my job as the GPU is to as fast as I can in the highest resolution that I can or I suppose a standard predetermined resolution as fast as I can.

45:21That will drive the resolution. Output a 2D thing that goes on the screen. So I turn 3D stuff into 2D stuff and I have to do that better than other things that I'm competing against where basically all of us are when you say commodity you mean limited by Moore's law and doing right up to the edge of what integrated circuit manufacturing techniques enable us to do. So everybody knows what this means is that they got a ship faster than their competitors and they also got a ship faster than their competitors because they're.

45:47about to go bankrupt. So they drop this plan that's like they're trying to thread like the tightest needle possible here. They have to lay off 70% of the company, which they do. They go down to about 35 people. And everybody who's staying knows we now have to design from scratch and ship a new chip before our runway runs out, which is nine months. You can't do that on a normal chip design cycle. It takes like two years, right?

46:16Yeah, the way that, you know, with these fabulous chip companies, the way they would design chips is they would work on the design, they would send them over to the fabulous company, the fabulous company would produce some prototypes, they'd send them back, they'd test them, they'd go back and forth a few times. You mean the foundry would produce them? Like the TSMC or the Samsung or the global foundries or? Now importantly, Nvidia is not using TSMC at this point because they can't, they can't, TSMC only works with the best and Nvidia is not the best. So they're using like second rate foundries. And that process takes a long time. And then at the end of it, when you're sure you've got the design rate, then you do what's called a tape out of the chip. I love this term, by the way. It harkens back to literally like when you used to tape, you know, masks to like do the photo lithography on the chip back in the day. So cool. But it just means finalizing the design.

47:07But you actually do run it on some prototypes first, like the foundry sends back some, you know, hey, thanks for the designs. Here's the chip. You know, run your tests on it, make sure everything does what you think it does. And, you know, that process takes two years to get a full sort of iteration on. Yep. So they're like, we can't do this. Like, Jensen's here. Like, here's what we're going to do. I've heard about this. There's new technologies, new machines out there that enable emulation of chips.

47:36And in our case, we're going to use it to emulate the graphics chips that we're designing, all in software. And it works. Their startups, but they exist. The problem is, when you emulate it in software, it's really slow. So, when you play a game, when you're looking at your computer monitor or whatever, it's refreshing 30 to 60 times a second. If you're a professional gamer, you probably have a go on it 120 times a second, frames per second.

48:04This emulator runs at one frame every 30 seconds. So they're going to have to debug this thing in software to save this time. Going at one frame every 30 seconds. It's just insane. That's brutal. They're basically making this trade-off of, okay, if we want to ship something in nine months, we don't have time to actually have it execute on the hardware. So we're going to make the trade-off of are testing being mind numbing, like running whatever our graphics tests are where we're looking for like this certain specified output.

48:34We need to plant someone in front of a screen to watch the new frame render once every 30 seconds and look against some tests to verify that the output is correct. And if it is, and this person does that mind numbing work and sits there just observing and observing and observing, then we will go right to manufacturing without ever producing a physical prototype and ship that. And that is exactly what they do. They have spent a million dollars just to get.

49:02the emulator, you know, hardware and software to do this. Which I think they had generated some revenue but it was still like a third of the cash that they had in the entire bank account. So they go down to six months until they're cash out in the company. They get it done in a few months and then they call up their foundry. I don't know if they're using United or one of the other foundries in Taiwan, not the SMC. They're like, all right, we taped this thing out.

49:29Send it to production. And the foundry's like, uh, you guys sure about that? They're like, yep, we're sure. Make, you know, 100,000 units. If I remember right, I think Nvidia basically was the only customer of that emulation software. Like that was a startup that really wasn't fully proven yet. But Nvidia was like, look, we literally have no options. Yeah, they were the only customer. And then that company went out of business after. It's wild.

49:57And so the chip they designed. So now the advantage, like this is lunacy, what they're doing. Obviously, they have to do it because they're back as against the wall. The advantage of this though is they are now designing this chip with the same set of assumptions about what technology is available as all their competitors. But their competitors are working on those designs. They're not going to be able to get them out for 18 to 24 months.

50:26Nvidia is gonna get this same generation of design out in six months. So this chip is called the Riva 128. That's what they call it. It is a freaking beast. And it is like a beast in every sense of the word. It's big. It's big. It's extremely powerful relative to anything else on the market. Like more powerful than any customers are telling them they want. Yeah, way more powerful. Way, way, way, way more powerful. But You know, it comes with some down, so with great power comes, you know, responsibility. Because they built this thing in such a manner, it like barely works. Like there's a lot of stuff wrong with it. I forget the exact number of this, but like essentially direct 3D at the time had something like, let's call it like 24, 25 different ways, like different sort of techniques. These are the like blend modes. Yeah, I think that's what it was, blend modes.

51:20and the Riva only works with about two thirds of them. Like one third of them, it just like freaking crashes. Like it just doesn't work. I thought even worse than that. But basically like, I think Nvidia had to launch a campaign going around to like all the different developers and being like, come on, what do you really need more than these eight for? Come on, what are you really going to do where you need to use that fancy stuff? Do us a favor for this generation of the chip. These eight were great. You're going to love them. They're so good and just use those.

51:49Okay, so this is so, so, so great because people do it. And so what they learn from this, like they learn about the market, the first iteration of Nvidia, we're going to build all this technology, we're going to drive the market. They didn't know anything about the market. They were just making all these assumptions about what people wanted. But now they're actually going out in Jensen's, going to these developers, trying to convince them to do this. And they all do it. Why do they do it? Because the only thing that matters is performance.

52:18consumers are going to buy hardware and games based on the quality of the graphics. This is like being discovered for the first time. And so people are willing to make a lot of compromises in service of performance. In videos, like the first one that figured this out because they have to go around and do this and developers all get on board. And to be clear, it's because the consumers making the buying decision, right, on what graphics card they buy. It's a completely interrelated system, where the consumer is making all of the decisions. That's where the demand is. The consumer is deciding what hardware to buy. That's what Nvidia's business is. Whether they're buying it as a fully built computer from the OEM, or whether they're buying the card to put in later themselves, they're making a decision on what graphics card goes in the computer. Exactly. And the game developers are making decisions on what

53:16graphics cards to support right and how to build their games with like the assumption of what's my target market of consumers like who do I think will this game run on do you need to have at least an x level performance rig in order to run my game or run my game it it's fullest form so the developers are premeditating what graphics cards are going to be out in the market when their games launch and they're saying yes it's going to be the most performant one at the right price point. So whatever the mass market is, we kind of have to target that. And if you're telling us, and we're going to test it, and it turns out that yours is the best performance per price, or performance per watt, or whatever, it's the most efficient card, then people are going to buy that one. And so we must target it. That card, and they're going to buy my game. I mean, I remember like, this is a few years later. This is a, you know, a trope that happened. There was a game called Crisis, C-R-Y-S-I-S. Remember this? Oh, yeah.

54:14What's the relationship between crisis and Far Cry? It was, oh no, Far Cry was the first game. Yeah, the crisis engine and then crisis also, it was super convoluted. Basically, my perception of this thing was when this came out, when Far Cry came out, this was like mid-2000s, the graphics were unbelievable, unbelievable, and if you had a rig powerful enough to run it, like just unbelievable, the game itself was total crap. Like, I don't think I ever played more than 10 minutes of it. I'm pretty sure if your computer didn't support it.

54:44There is all these videos that people would record of like building a tower of like a thousand gasoline barrels and then shooting it and because it was too complex for their graphics card to handle their computer would just freeze. That was the failure mode of far cry with non-performance chips. This is how the hardcore gaming industry evolves like far cry sold so much software and so much hardware just because people wanted to experience that.

55:13you to attempt to experience that level of graphics. And so that's what the developers are starting to figure out. They're like, all right, well, if you can ship this thing, we'll use only those eight blend modes or whatever, like whatever it takes, because we want, you know, graphical performance is the most important thing. So it works. They sell one million units of the Riva 128 within four months. Wow. I should have looked with the MSRP was of it.

55:41But that is a lot of revenue. Yeah, no kidding. What year was this? This was 1997. Okay, so we're, it's an interesting era. Like the internet is a thing, at least still have a few more years till the dot com bubble crashes. PlayStation one is out, but PS2 is not out yet, I think. Yeah, PlayStation one. And with that, the gaming market kind of bifurcated into like sort of the, you know, the console market.

56:07which was standardized, and you knew it was all going to work. And then the hard core PC gaming market, which just had so much revenue potential, even though it was smaller in terms of numbers, because people are willing to spend so much money on this stuff. So at the end of this, Nvidia has now figured out these dynamics of the PC gaming market. And they now have a process within the company to design and ship each next generation of their hardware in a six month timeline. While the rest of the industry is on an 18 to 24 month timeline. Necessity is the mother of invention. To say this is huge is like understatement of the century. Huge. At its huge for this market. But nobody even saw this at the time. Like Jensen didn't see this. Nobody saw this. They're now shipping relatively, you know, doubling essentially the performance in each generation with their hardware. And they're shipping it every

57:06six months. And you think about Moore's law, right? Like, Moore's law was that the number of transistors on a chip equating to the compute power available at a given price point to the market would double every 18 to 24 months. And video is now on a cycle starting in 1997, 1988, where they are doubling the performance that they are delivering at a given price point to the market every six months. It's fascinating.

57:34And they're also competing on a different vector than the CPU manufacturers because then it's kind of amazing. We've made it an hour into the episode and haven't talked about this yet. But the magic of GPUs is that they're very, very parallel like CPUs for anyone who's taken a low level computing class. You sort of know that like every time the clock ticks an instruction can sort of run and things move through the.

58:01sort of long chain of operations that can happen within the CPU, and it's advancing things serially through the processor. It's serial processing. It can read from a register or can add two things together, but like it's all happening serially. It's like the, uh, I love Lucy, um, you know, famous one where like the chocolates are coming down the factory pipeline and you had the CPU as to like wrap each individual chocolate one and then the next one. Yes, exactly. And with graphics processing, like, The magic of it is that it's super parallelizable like there's all these things that need to get output into the screen that do not depend on each other and so you can do them independently and so the vector that they're competing on is really like oh we can and that it would be years before they would really get to this but add more and more cores or find more ways to execute more instructions simultaneously to parallelize these tasks and I think

58:58At the time, people thought really the only big use case for parallelization is graphics. Let's put a pin in that for now, but it's worth knowing the thing that they're doing is figuring out how to process more things in parallel faster. Yes. So graphics cards, like in videos, making at this point in time are really good at in parallel, lighting the pixels on a screen, you know, 30, 60, 120 times a second.

59:28with the images that are being fed to them from like the game or the graphics program, which is living all in the CPU land. So like your game developer, you develop in Microsoft Direct3D, becomes DirectX or OpenGL is the open source competitor to this. All that logic is really happening in the CPU realm and what that means is if you think back to games from this time, I think console games, PlayStation 1, even PlayStation 2 and 64. And you look at the graphics in those games or PC games from the time two. They're all kind of the same. They're all the same, right? All the lighting, like the lighting, it's all like pre done. So like when you're a game developer, you set the scene.

1:00:19You'd never see like a character running around carrying a torch and that torch's light like impacting the rest of the environment. It's all set in advance. Like no intelligence is happening in the GPU level with the screen. It's just lighting up the pixels. Basically in order to make it easy for developers, the software development kit is written at such a high level that you don't really get enough control.

1:00:44to make your game stylistically different, you just get to lay out the items on screen. It's all the same, it's all flat. Maybe you can program that, like, hard code that, like, oh, time of day might change and, like, that might change the way things look, but you're hard coding, like, what they look like. No computation is happening, right? If you're playing a game today, even the most basic, you know, mobile game or whatever, you're seeing dynamic lighting and shading, which we'll get into in a sec, all over the place.

1:01:14So this is still like in, you know, GPUs are like a really, really important sort of commodity, but there are commodity. There's not a lot of smarts happening here. Yep, no programming. But Nvidia has figured this out. They can now ship on a six month time cycle. They're starting to like really take huge market share. Now, a lot of people start paying attention to them in a good way. TSMC that wouldn't even return Jensen's calls back in the day.

1:01:41There's this amazing, amazing story. Did you watch the TSMC 30th anniversary? I did. Celebration. This is so, it's like three hours on YouTube. This is worth a brief aside. This is how much pull Morris Chang from TSMC has. He gets the CEOs on stage of NVIDIA. Arm. Arm. ASML. Qualcomm and Broadcom. Yep. I don't think Lisa from AMD was there.

1:02:08No, it's basically everyone but AMD, the sort of pillars of the TSMC ecosystem. I mean, Morris is playing interviewer, like it's very entertaining to watch. It's like a celebration of Morris and of TSMC. It's amazing. It's amazing. Yes. So in the section with Jensen, they tell the story of how Nvidia, at this point, it's gotta be TSMC's biggest customer. I mean, they've been like tied at the hip forever of how this all came to be.

1:02:38After the Riva 128 hits and has become a big success, Jensen writes a letter to more like a physical letter, addresses it to Morris Chang in Taiwan. Because he can't get in touch through any of the like salespeople. Exactly, exactly. They've all just been ignoring him as well they should because they were a, you know, left for dead startup in a sea of startups. The letter gets to Morris. He opens it. He reads it in Taiwan.

1:03:06He does the most Morris Chang thing possible. He calls up Jensen on the phone right there. And the phone rings as they tell the story in the Nvidia office. This is in the middle of their trying like mad scramble as a startup to ship these Riva 128's that are coming in. They're testing them all by hand in the office because none of this stuff was it's fresh off the line. It's not been tested. It's chaos. Jensen picked up the phone. It's like, yeah, who's this? Morris is like, hello.

1:03:35This is Morris Chang at TSMC. I got your letter. And Morris says that there's like a silence on the other end for a couple of seconds. And then he hears Jensen yelling, everybody shut up. Morris Chang is on the phone. Amazing. And that's how TSMC became the manufacturer of Nvidia chips. Yep. The next year, the two companies sign a huge multi-year deal.

1:04:02for TSMC to become the primary foundry for Nvidia and still are today. Jensen and Morris are super close. It's a landmark, landmark deal for both companies. So with now, an actually really good foundry has their partner and this super unique chip development process Nvidia just keeps accelerating. So in 1999, they rebrand their products, you know, they'd use the NV1 first, and then this Reval 128, they actually run a little contest of what they should name the products and the winning name is geometry force forces with you, which they shortened to GeForce, which anybody who knows who, you know, buys graphics card, the Nvidia GeForce, still the brand name they use for their gaming cards today and is probably the most one of the most respected, you know, brands in the gaming ecosystem.

1:05:00And it's because this card that they ship, the first GeForce in 1999, it's the GeForce 256. It's so powerful. It has five X better graphics performance than like anything else on the market. And they call this like the first GPU, right? Don't they say like we're inventing the GPU? They call it a GPU.

1:05:24Before this, the term GPU didn't exist. It was, these were graphics cards, graphics chips. I think Sony had, like, sort of used it about the PlayStation, but no one's marketing this idea. So they market this as the graphical processing unit. Now on the one hand, that's, like, sort of, like, marketing bravado. On the other hand, that is, like, a very loaded statement to make.

1:05:53And why so? What is Jensen in Nvidia mean by this? So, Intel, you know, you think chips, you think Intel, right? You think so, like, can you think Intel? Intel's whole strategy at this point in time was basically, they're almost like a biotech company today, like one of the big pharma companies. Or put another way, it was another version of the Microsoft embrace extend, extinguish thing.

1:06:19They would see there all these peripherals, sound cards, networking collards, all the graphics cards, all the stuff we've talked about. They would let all these flowers bloom, be like, oh, yeah, yeah, yeah, just plug into the PCI slots on our motherboards. No big deal. We're an open ecosystem. We want everybody to flourish. And then they would see which of these peripherals got consumer traction. And then they would just turn them into a component in the motherboard. And thus began the Wave of being able to buy a PC with an Intel motherboard and integrated graphics. Well, and before that, you know, integrated sound, integrated networking. Like, remember, oh, so fun doing this research. Remember the company creative and the sound blaster cards? Oh, yeah. I remember buying tons of that stuff. Like, and then at a certain point, you stopped buying sound blaster cards, right? You're like, oh, the motherboard does 90% of what I needed to do. And why would I spend extra money on a separate thing?

1:07:15Exactly. And so until they just sit back, they'd watch all this happening, they'd integrate it game over for those startups. And there was like reasons for specialized stuff. Like I remember buying a special network card because the integrated networking capability of the motherboard on my, I don't know what it was, a Mac 8500 or something, wasn't as fast as like if you bought a dedicated PCI card that could be a faster networking card. And graphics cards would sort of become that same thing where The integrated graphics for most people was good enough unless you were a gamer in which case you'd go buy your own graphics card or you'd buy it directly from the OEM when they were making the computer and shipping it to you. But wait a generation or two, even if you have the most demanding performance for home networking, you're not playing a separate networking card like get out of here. These things are like dead end businesses. And there's no reason why graphics cards wouldn't be the same. So Jensen and Intel coming out and being like,

1:08:15We're a graphical processing unit. We're a GPU. It's a big middle finger to Intel and this whole CPU dominant world. And it really wasn't true yet. It wasn't a processing unit in the same way that a CPU is a processing unit where it was. People could write software for it in a way that created a meaningfully different experience for people using the software. Yep, but this is where you know, Jensen is just such a.

1:08:44Master strategist in Nvidia was so great like this whole kind of orchestration of a bunch of things all hit over the next couple years so first Nvidia goes public You know, they've now shipped the Revo 128 was a huge hit this new GeForce 256 flying off the shelves they go public in beginning in 1999 at a six hundred million dollar market cap So a hundred X return from the $6 million post money valuation on the Sequoia and Sutter Hill round. That gets them, you know, some more capital. And then behind the scenes, they're working. They're in talks with Microsoft. Microsoft's got a secret project that they're working on at this time, the Xbox, which we talked about a lot on the Sony episode and so many times on the show. And Microsoft comes to Nvidia.

1:09:36And like, we want you to be a key supplier of the graphics, the GPU, for the Xbox and they do a huge, huge deal. $500 million a year deal for Nvidia to supply the graphics for the Xbox with a $200 million advance. And the chip that they use is a modified version of this incredible new chip.

1:10:05that NVIDIA is working on the size, like Steve Jobs said, but Jetson sounds like Steve Jobs talking about this. The GeForce 3, which introduces for the first time programmable shaders and lighting on the GPU. Everything we just talked about, the GPU massively parallel can light all these pixels, but it's essentially just taken instructions that are pre-hard-coded baked in on what the lighting is going to look like.

1:10:35Now you can program for these GPUs, and you can make dynamic lighting in games and 3D graphics that is calculated. This is game changing. The way to think about it is those GPUs, in quotes, were fixed function graphics accelerators. So they would be able to map textures onto a set of polygons, but you couldn't do the thing that you're talking about, David, custom lighting. A lot of that sort of stuff took to actually program at the GPU level what is happening and so this is like of course it's cool because it's a wave of new consumer experiences that can happen because every game developer can kind of stylistically put their own stamp on games but it's a totally different metaphor for the computer architecture where suddenly you can program a GPU and I guess that's why they're calling it a GPU and this is different than a graphics card and Nvidia develops in conjunction with this

1:11:34they call it CG. Literally like they extend the C programming language with graphics, libraries, and capabilities to directly program graphics and lighting and shaders for the GPU. So this makes, you know, that sort of like marketing, you know, this GeForce 256, it's a GPU. Now it's real. Like, this is a graphical processing unit that is intelligent, that is Every bit is, you know, maybe not every bit as important as the CPU yet, but like, this is like the stake in the ground of like, this is no sound card. This is not gonna get commoditized. Do you know if this was the GeForce FX, or if the GeForce FX was a similar version of this that was available to PC? That's a good question. It was the GeForce 3 was the PC version of this. Okay. This move to programmable shaders was a bet the company move, and it was

1:12:30Jensen's answer to, how do we get out of this commodity business and do something unique and different? And I'm pretty sure they were like months away from cash out again by pulling this move because of how aggressively they had to staff this like very new type of product they were inventing. Yeah, I mean, this is the impact of that original sort of quicksotic vision for the company of we're going to create an industry We're going to create the API's SDK to interface with it. We're going to do all this like now they're doing it. And they're doing it with Microsoft this time instead of like against Microsoft. So like a plus move there. Yeah. But yeah, like the amount of capital investment that went into this was enormous. So at this point, Intel's like, we might have a problem here.

1:13:25Right. It's going to be more difficult than we thought to just take whatever these people are doing and integrate it directly into our, our motherboards. Yep. And irony of ironies. Jensen presses this even further. He does a big partnership with AMD. It's worth knowing here when you're saying AMD because people probably know AMD and Nvidia are big competitors today in the GPU world. Not yet. Right. AMD primarily made CPUs at this point. They made processors and competed with Intel.

1:13:50They hadn't yet bought ATI, which is where the radion business comes from. That's all the graphics stuff that they do today. Yeah, ATI at this point was the number two competitor to Nvidia. Actually, an amazing story too. It was a Canadian company started in the 80s and pivoted into graphics cards like very different. I feel like there's a lesson in here. We could talk about this in playbook, but when all the VCs funded these 90 Silicon Valley startups to go.

1:14:18make graphics cards, 3D graphics cards. The only two surviving ones were Nvidia, which went through this hellish journey. And then these Canadian guys that were like totally out of the ecosystem and like did it sort of more and more bootstrapped away and evolved into the space. Jensen has a great quote about this and he's giving this lecture at Stanford years later and he says, when technology moves this fast, if you're not reinventing yourself, you're just slowly dying.

1:14:46You're slowly dying, unfortunately, at the rate of Moore's Law, which is the fastest of any rate that we know. It's so clarifying of how he thinks about why Nvidia needed to do these like three complete transformations of the company, bet it all, risk it all. Because if you're not, you're one of those 89 companies. Exactly. So Intel's like, holy crap.

1:15:11We might have a problem under here. This is not a problem for Intel. It just is a thing they're going to have to deal with instead of it being part of their extinguished strategy. Right. Intel is used to at this point, just Microsoft at this point. Oh, sure. You want to go make Word perfect? We'll let you do that. We'll see these great applications, and then we'll go make our own. That's what Intel's doing. Now, this is the first example of Intel's gonna have some trouble doing this on their own. So they actually, at first, come out with their own dedicated Intel graphics, GPUs, graphics cards, competing as separate cards, other than Intel had ever done that. And maybe speaking out of turn here, but as far as I know, this is not a common strategy for Intel. It's usually integrate into the motherboard and CPU. They come out with their own external cards right around this time, like 1999.

1:16:06to directly compete and they suck. These are some of the worst-reviewed graphics cards in history. Talk about not your core competency. Not your core competency. And it really illustrates how different Nvidia's approach was to what graphics cards had been before and building programmable shaders and creating CG, which was a little bit of an early strategy and something they would later do with CUDA, but really understanding that like, oh, we can differentiate our hardware not only with interesting hardware features, but by building software on top that it only works with our hardware, but makes it really great for developers to develop for our thing. So Intel does make a big push of this, actually, you know, ends up becoming a great strategy for them into integrated graphics. So they do try and integrate this, but it's never good enough for the high end. It's only good enough for...

1:16:57If you don't care about graphical applications for laptops and the like, and that's great. That ends up, you know, that's a big market for them for a long time, and especially leading into mobile, although Intel and mobile is a story for another day. But for the hardcore market, and that's making it sound too small, for the market of anybody who cares about Graphical performance and quality, which is not just gaming at this point, you know, it's 3D modeling, it's architecture, it's lots and lots of graphical, high performance graphical computing applications. You're always going to want it's this dynamic and it sets up just like Moore's Law. Whatever the current maximum is, it's not enough. It's never enough. You always want more. As good as graphics are today.

1:17:47It'll never be good enough. Ten years from now, game graphics will make today's graphics look silly and will all be in the metaverse or the omniverse if Nvidia has their way, but it still won't be good enough. Like, it's more like you always want as much performance as possible. All right, listeners. Now is a great time to thank our longtime friend of the show ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:19:38So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. Okay, David. So Xbox comes out and video has a card in there that is the the GPU of the Xbox that has programmable shaders. So, you know, rather than you know, literally just spitting out triangles to put on screen. They actually are running these little programs in shaders. It's super cool. What happens after that? Basically, the company goes like supernova in a good way, in a good way at this point in time. So the fiscal year that ends January 31st, 1999, this is like right before they go public or right as they go public, they did $158 million in revenue next year.

1:20:31the fiscal year ended January 31st 2000, so like the calendar year 1999, they do $375 million in revenue. So more than double that year. Wow. The next year, they do $735 million in revenue. The year after that, which is basically the calendar year 2001, the year the Xbox comes out, they do just about $1.4 billion in revenue, which makes them the fastest semiconductor.

1:21:00ever to reach a billion in revenue and gets them added to the S&P 500. And this is the company's essentially ninth year of existence. They're already doing over a billion dollars a year in revenue throughout the company's history. They basically have these like six to ten year epochs. And during those they have like a meteoric rise when they do something contrarian that's off the rest of the industry and then it starts to taper and they need to figure out how to reinvent themselves again. And so we sort of saw it the first time before the competitors come in and the competitors come in and then we see it again with them figuring out we're going to do the emulated version of letting our engineers design the chips and lay out the chips so we can be faster than everyone and then everyone sort of catches up and they have to do it again with programmable shaders launching those to the industry and then they have these few amazing years after that there is kind of a plateau again and you can see it in their revenue

1:21:56they did obviously close to $2 billion as we move through 2001. They stayed reasonably flat for a few years after that. I think they eventually did $2.8 billion in 2005, but it was kind of barely profitable. Like they never lost money, but net income for each of those years was only a couple hundred million or less.

1:22:17So it's not like they're this like super free cash flow positive company. They're not adding to their cash pile in a meaningful way. You can start to see competitors figure out programmable shaders too. Yep. ATI of course. And then in 2005, I think it is AMD. That's where they start shopping around. O6 is when the transaction actually happens. They buy a TI and of course now AMD is the main competitor to Nvidia. So.

1:22:45I'm gonna tell those stories on the next episode, but basically like a little sort of teaser or what's going on here. They kind of take their eye off the ball in the gaming market. Now maybe that's too harsh. I don't know what Jensen would say about that, but right around this time, there's something that ultimately becomes pretty amazing that happens, which is they've achieved the dream at Nvidia. They've created a Programmable GPU. It is truly a GPU. It rivals the CPU. This is the model they have driven forth this new industry of computer graphics, enabled a whole generation of storytellers to program their GPUs and tell stories. A whole new class of users and developers starts to tinker around with these GPUs.

1:23:45And, uh, Jensen likes to tell a little story that's probably apocryphal, but, you know, we'll repeat it here as a little teaser for next time. Right around, you know, sort of the early 2000s, a quantum chemistry researcher at Stanford calls up Jensen, and he's like, I need to thank you. Because, you know, I do this work in my lab on these supercomputers that we have at Stanford.

1:24:13write these models for the molecules that I'm researching. And it takes a couple weeks to, you know, finish the computation on these models. Well, my son, who's a gamer, he told me that I might want to try going over to fries the local electronic store and buying a bunch of your GeForce cards. So I did. And that I should try porting my models into CG into your, you know, graphics computer.

1:24:41language, and just see what happens. Well, I did it, and my computation finished in a couple hours. So I waited a couple weeks for the supercomputer here at Stanford to finish. I checked the results, and they were identical. Boom. Boom. It's like, so I just want to thank you, Jensen, for making my life's work achievable in my lifetime.

1:25:04It's for sure something that Jensen made up. Maybe did, maybe did. It's probably cobbled together from a few different people's experiences. Probably it's a composite, but every word of it is true in spirit. Yes. There is a whole industry called scientific computing or whole segment that in video would be able to address in the future, but they need a whole lot of tools to be built for them to be able to really use GPUs for all those purposes and more with machine learning and everything else.

1:25:34Right now, yes, you are buying off the shelf GeForces here in this mid-2000s era and trying your best to sort of hack them together to do your super parallel processing task that is not specifically building a cool video game. What's interesting is the industry perception around this time was that Nvidia had started to sort of focus on this high-performance computing segment and that they were starting to take their eye off the ball in gaming.

1:26:03So, people were starting to think like, oh, maybe ITI is actually more interesting as a gaming specific graphics card maker at this point. And there's a little known fact that is, so you mentioned this AMD ATI deal. And like, we all think the AMD radion at this point, you don't think about the ATI radion, which was the, I think they retired the ATI brand in 2009. But AMD's first choice was actually Nvidia.

1:26:30So AMD tried to buy Nvidia to make that their graphics line and it was possible because it's not like the stock was blowing up at this point in time. It had this sort of few years of reasonable stagnation before we get into late 2006, 2007 and certainly people didn't see the machine learning market. People didn't really see the scientific computing market and it was like, hey, maybe this company needs some guidance from a smart company like us, AMD. And so they make the offer and there's the cover story on Forbes. We'll put it in the show notes, but there's this article that comes out called Shoot to Kill. And Jensen in this merger acquisition talk with AMD insisted that he be the CEO of the combined company. And that is the thing that blew up the deal and instead AMD went and bought ATI in the rest of history.

1:27:26Oh, man. That is such a good what would have happened otherwise. Well, should we use that to transition and do analysis for this one? Yeah, let's do it. So I thought it'd be fun to do narratives. Like, let's take it from this point in time. The AMD ATI deal has just happened. We're sort of looking forward. It's 2006. You know, what's the bear in bowl case for the company? And I thought an interesting data point to sort of ground this discussion would be that If we look at the gross margins today for Nvidia, which we will talk in our whole next episode about everything that they do that's so insanely differentiated, they sell their GPUs at a 66% gross margin. Hardware business with a 66% gross margin. Back in 2004, that gross margin was only 29%.

1:28:16that they were able to command as a premium on their cards and so you can kind of see like all of their economic potential was being competed away and they weren't doing anything to differentiate in a way to get any sort of pricing power and so you think you make that 29% then you need to use that to pay all your overhead and fix costs and your engineers and develop the next product and port into R&D and sure they had a few great years of doubling in revenue after going public but It's not looking great right now in 2006. Yes. And there's also another reason why their gross margins are so low in those years following 2001. So they made this deal with Microsoft, right? To power the Xbox. And it was absolutely the right strategic decision to power the Xbox to

1:29:14get Microsoft's support in creating CG for programmable shaders, protect themselves from Intel. But if you're going to deal with Microsoft, they're going to extract their pound of flesh. So you'll note there are three game consoles in the history of game consoles that Nvidia has powered, the original Xbox, the PlayStation 3.

1:29:44which we'll talk about next time, and then Nintendo Switch. They have not done any others, really. And people always ask in Jensen about this. He's diplomatic about this, but because it's a crappy gross margin business, right? Yeah, there's a $500 million a year revenue deal with Microsoft. $500 million a year when their whole company revenue is a billion. Well, that's...

1:30:11It's $500 million a year of very low gross margin revenue. Yeah, I think the way that he talks about this sort of opportunity and the talk that I watched him give you didn't name names, but he says, people always ask me, you know, they come to me and say, Johnson, why are you making this great game console GPU? Like, what a waste? Why wouldn't you do that? And he always talks about it like, there's a lot of things we could spend our resources doing. And if I don't think that we can do anything really unique and special and really change the world, then we have better things to spend our resources on. And that is kind of gents and speak for like, no, there's crap margins in that. I'm not doing that. But he is right that like given a finite amount of resources, you have to allocate your capital and your resources in the most optimal both short term cash flowing way, but also long term strategic way. You know, it seems like from their sort of analysis, especially recently with game consoles, sure we might be able to make some low margin revenue on it, but it's not strategic for us long term to do that.

1:31:09It's probably at this point in time a little too much of an exaggeration to say that they're out of the fire and into the frying pan having solved their Intel existential strategic challenge and ending up now sort of at odds with Microsoft. That's too much, but there's a lot of truth to that. So if you're looking at this stock in those years, especially as revenue starts to flatten, and a big part of that is coming out towards the end of the Xbox.

1:31:36generation of consoles leading into the Xbox 360 which of course in video does not power. That's a lot of gaming revenue, top line revenue going away. Meanwhile, there's spending tons of resources investing in this new high power computing segment for these researchers. Here a little bit like...

1:31:56Okay, Jensen, do you really know what you're doing here? And in 2006 Intel launches or announces this project Larabee where they're gonna be like a full-fledged GPU maker. I mean, this is like a totally second foray of Intel's really into this. So you're like, okay, you've had to like be this commodity where you're living on Intel's motherboard. Customers are only choosing to buy your product when the integrated card isn't good enough for them. The person that makes the integrated card is now announced they're gonna be like a real Honest to goodness GPU maker. So like are you betting the farm on scientific computing? How big is that market? So the answer is

1:32:35Yes, and that is also the bull case. And it turns out scientific computing would be so much more than scientific computing. And it would be, you know, the acceleration of all the other things in our computing world that has been very advantageous to become parallelizable. But I will leave it there so I don't have too many spoilers. But that is 100% the bull case and 100% what happened. Yeah, it's interesting. We're working on an episode two with Hamilton Helmer and his colleague Chen Yi at Strategy Capital about power, specifically with platforms, how to apply power to platform businesses. It probably won't be out yet when this episode comes out, but it'll be coming out shortly thereafter. They make the point, and it's a very, very valid one, that when you climb the mountain as a founder and a company of finding product market fit, it's very different than climbing the mountain of then having to go develop power. It's a whole second journey that you have to go on.

1:33:35It's a whole second invention. And at this point, Nvidia had definitely found product market fit, but had not yet found their source of power. So, you know, if you're looking at this company at this moment in time, especially as revenues flattening, coming off the Xbox contract, costs, opX is going way up, investing in this sort of speculative new area. I can totally see looking at this and being like, Wow, this is yet another Silicon Valley startup that had immense product market fit top line revenue sword, but now we're kind of coming to the end of that and there's not a lot of power, you know, as defined by sustainable, you know, economic profit, you know, operating cash flow coming out of this thing. So then as we talk about power here.

1:34:28What power do they have? And for listeners who are newer, this is really what is it that enables the business to have persistent, deferential returns or sort of in a sustainable way be more profitable than their closest competitor? They really didn't have power. I mean, I'm trying to think which of the seven powers can we make the best case that they did have? It's not switching costs. Switching costs are crazy easy.

1:34:54So switching costs is interesting, right? Like, I think they were trying really hard to develop it. They did a really good job. I mean, they made CG in collaboration with Microsoft and CG works on Nvidia products, but it's not like CUDA today to flash forward to next time. Yeah, so it was like they had the inkling of how they could get power, but it was not yet implemented. And Microsoft didn't have a lot of interest in helping Nvidia create huge switching costs there. Right. Because Microsoft wants to play Switzerland like, hey, anyone that is an application developer for Windows should be able to use whatever hardware is on any PC in a really great way. And so we want to commoditize all of our suppliers. So maybe some an attempt at switching costs that was not fully realized.

1:35:46I think they probably thought and did for a while have process power in this six month shipping cycle that none of their competitors could match for a while. Yep. But certainly the delta of NVIDIA's shipping cycles versus competitors compressed over time. Okay, playbook. I have one big one that we have not discussed. We sprinkle in lots of like playbook themes, but there's one to me that I want to call out and draw through line to something that's happening with NVIDIA today.

1:36:16And that is simulation. So there's a thing that we're going to talk about a lot on the next episode, which is totally changing the world as we know it, which is things that we used to have to do physically we now do in simulation. An obvious example of this is Boeing doesn't take every part and throw it into a wind tunnel. Well, maybe Boeing does, but the zillion new space startups certainly don't do that. They simulate the atmospheric effects on stuff and it happens way faster and it lowers your iteration time.

1:36:45And another one is drug discovery. Like you look at how fast we came up with coronavirus vaccines. Simulation, it's an absolute miracle. And everything in our world is being compressed 10 times, 100 times faster because we're able to simulate it rather than needing to do it in the real world. The interesting thing is a lot of that is actually powered by a lot of the machine learning advances that Nvidia is doing in today's world with cool things that you can do on GPUs.

1:37:15But the reason I'm talking about it in this episode is that DNA comes from the fact that in order to survive, when they had nine months left, the way that they saved themselves was with simulation. So it became very clear to the company very early on the benefits of being able to simulate something rather than having to do it in the real world. Similarly, a playbook theme I wanted to highlight that we have not talked about explicitly yet is just the power of democratizing tools for developers. And Jensen really saw this back in his AMD days before going to LSI logic, but the ability for Nvidia to use an emulator, software emulator, to design their chips, and then of course the massive, massive strides that the EDA industry has made since then. And then Nvidia itself, enabling, we haven't really talked about it as much, but like Jensen and

1:38:14Chris and Curtis's original vision did come true. They created a new artistic platform for artists to tell their stories. And without this industry and all the hardware, software, tools that went into creating it, there's no way that anybody would have to be a John Carmack to tell a story in this medium. And there are very, very few John Carmack's out there in terms of being gifted enough developers, and surrounded by storytellers too, and being a great storyteller himself, to be an artist, to be, Nvidia talks about this now in their marketing materials, to be DaVinci and Einstein, you know, together in one person. Yeah, it reminds me of the people that do like the crazy cool art in Microsoft Excel by like painting each of the cells a different color.

1:39:08You had to be that type of person to be a game developer in Karmak's era because it was esoteric as hell to be able to actually figure out how to make this hardware do what you want. Another big one I want to highlight, you know, I just keep thinking back going to the thing back to the original time when Nvidia was funded. I wonder what like, if they're really honest with themselves, like what Sequoia and Don Valentine would think about that. They made The wrong venture bet like in a market like that we see it all the time like look at Web 3 right now if there's a team making some new Vision and for a class of applications in Web 3 like they're gonna get term sheets from everybody and then there's gonna be a million copycats the next day It is the beauty of proliferation and then consolidation. I mean Buffett has I think it's in a 2000 fortune article that he wrote it's weird that I know that but I think that's right

1:40:06In an op-ed about how there were whatever it was 70 car companies before we narrowed it all the way down to for GM and Chrysler and the airlines were sort of the same way there's this proliferation there's massive there's no one can really differentiate no one can build any power and so you only have a few survivors left and in general they compete on pre-low margins when there's only a few left and their defensibility comes from their scale.

1:40:29You know, I think open question if that's sort of how the graphics market necessarily matured, but you're absolutely right to like sort of self reflect on the time when Sequoia and Sutter Hill invested to say, would you make that type of bet again? You backed one of the two winning horses out of 90. Should you do that and just say, well, we're betting on amazing founders or should you? Well, I think that's so this is the nuance. I think what is so cool.

1:40:59And you know, the fun of the art and the science of sort of what we do, the company they backed was wrong. And yet it became, I don't know how long Sequoia's held. I mean, I think a lot of the GPs at Sequoia and certainly Mark Stevens who was one of my professors at GSB who was on the board for Sequoia's still on the board have held their shares personally for like to this day. Like that's one of the best venture investment returns of all time.

1:41:27Full stop period anything going from a six million dollar valuation to the eighth largest company in the world definitely has to be one of the best of all time right and so like they were wrong You know actually and yet they were right right and like why are they right like they were right because? Frankly of densit is a reasonable enough market the question is what are you better off doing what they did and investing at the proliferation phase?

1:41:56on someone you believe is going to figure it out and have a good shot at being one of the winners, or should you wait until consolidation and just pay that much higher price in order to back one of the ones that are already running away with the market. Well, and back then, in the day, there was no option, right? There were no stages of venture capital. There was, you raise your venture capital and then hopefully you're profitable enough to go public.

1:42:18They did raise some more money in between that initial $2 million and going public. I think they raised $20 million in total, but there wasn't a lot of window. And I think it was Sequoia and Sutter Hill that put that capital in for the rest of that $20 million. But it's really interesting to think about these cases. It takes Sequoia and Sutter Hill, too, specifically. They've gotten it right so many times, but it's not a straight line. So what's the lesson from that?

1:42:45Yeah, and the magic was that Jensen really figured it out early that they were in a business that was totally at the mercy of Moore's law. And so like in having that initial realization as early as they did with the proliferation of competitors and everyone doing, you know, the triangles and direct tags and that, that taught them the lesson early enough that, oh, we are in a business where we must be reinventing. There is no way to stay ahead other than ruthless self-examination and completely upending and rebending the business. Yeah. Ship faster and reinvent. Yeah. Yeah. So that, I mean, that to me is why they, why they survived. If you think about the class of companies that are like the greatest venture returns of all time, some of them are like in video where like you look at the team, you look at the

1:43:42business plan, the thesis originally, and like, yeah, it wasn't a straight line, but it worked out. But then some of them are, you know, Sequoia even used to talk about this on their website, the misfits. The ones that look like unfundable. Steve Jobs smelling bad, you know, that sort of. Right. Yeah. So it's like, and I think, you know, plenty of venture firms, but I have to hand it to Sequoia over history too. Like they've done a really good job of doing both of these. They do the Steve Jobs.

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1:45:16All right, David. So what is the company that they invested in? Ben, you are talking about keyhole. Yes. I thought you would know. So I love this little foreshadow before we get to grading because I think it's so interesting that Jensen basically saw the potential of keyhole and without sharing what keyhole became. I think the student listeners will know. We've talked about it on acquired. And we have. We've done an episode on it.

1:45:40Basically, this company that can't raise any money for anyone else comes and pitches Jensen and he's like, oh my god, I see this. This is the future. This is simulation. Like you are creating a model of the earth in software and people can just navigate around the earth. And so now that I've given it away, a graphical model of the earth. Yes. Google acquired it. It became Google Earth and video was one of the early investors and that really goes to speak to like where Jensen and the leadership team at Nvidia sort of saw their business going from this point forward, where it was all about simulation. It was all about using massively parallel computing to build brand new experiences to enable research to enable. I don't think there was any machine learning going on. I think it was all sort of like the graphical use of the chip, but this sort of like gets into the omniverse stuff that they're doing now.

1:46:35And one of the main reasons that I think they invested was because you wanted to just stay alive so they could keep demoing it to customers because it showed off and video technology so well, but I just love that little tidbit. Yeah, we did our episode. Years ago now, the Google Maps episode, that was such a good one. Yeah, where two keyhole and there were three companies that Google all bought and matched up in the parlance of the day.

1:47:02to ultimately become Google Maps. Zip Dash. Zip Dash, yes. And they were all like $20, $30 million acquisitions. Amazing. That's what's so cool about this. And I think maybe this is the like where Jensen and the Nvidia story bridge from like the, oh, it was the, you know, obvious investment market to bet on, team to bet on to go all-star engineers to go build this graphics card.

1:47:32Nobody really could have seen that graphics were gonna become a lot more than games. Like, you maybe could have seen it. Like, you know, there was SGI and Hollywood and Jurassic Park and there were some military applications for computer graphics, but very few even deaths in an Nvidia. They were like video games of the thing. Fortunately, that became the biggest entertainment medium and so even if that was your only market. Keyhole and Google Earth and Google Maps, such a great example of like Computer graphics became so much more important than like irrelevant beyond just video games And that's all a computer, you know dynamically generated programmable computer graphics that are making all of that all that happened All right, so how are we gonna grade this? Yeah, so I'm thinking given the opportunity the market opportunity that existed between 1993 and 2006 for computer graphics

1:48:29How did Nvidia do at exploiting that market opportunity and like share price is a reasonable way to think about it. I think it's a second order metric on like how were they at creating value and capturing value and I'd say like their value creation was amazing. Their value capture yeah. They did better than anyone else as far as I could figure out the question I was sort of trying to figure out is that.

1:48:58There were 90 other competitors doing the same-ish thing to wish survived. Was there anyone else in the value chain that was able to do a much better job capturing? Like would you rather have been Microsoft than Nvidia? This leads into the really interesting question to think about for Nvidia in this period. Microsoft did basically nothing.

1:49:22Now, okay, that's not fair to Microsoft. Sure, there was a large team that did DirectX. Huge team. In the Xbox project was amazing. I don't mean that in any way to throw shade at anybody on Microsoft, but they were in this position where they could just sit there. They could watch the market develop for computer graphics. They could be pretty by making good, very good strategic decisions. They could capture a ton.

1:49:51of the value with other companies taking the risks of developing the market, figuring out all this stuff, and then Microsoft can come along and be like, great in video, we're going to help save you from Intel. In return, you're going to give us a really sweetheart deal on these chips, and you're going to put us in business with Xbox. By the way, the other side of your gaming and computer graphics business on PCs, We're going to become your primary partner for that too, and all of the development languages that you're going to create and CG and all that. Yeah, we're tightly coupled with that and it's all going to work only on Windows. I think your assessment of Microsoft did basically nothing except make really good strategic decisions is like reasonable enough for DirectX, but totally is not fair for Xbox. No, it's not fair for Xbox at all. It's not, it's not. But it is an interesting way of, like,

1:50:49To put it another way and let's exclude Xbox for a moment, you're basically just recognizing that Microsoft had an unbelievable position in the market and did an amazing capital allocation job exploiting it and basically saying, hey, you know what? You know what? We don't need to do all that crap that Nvidia and ATI and all those guys are doing. You know how we can still retain our market position and continue printing money the way that we do? This thing.

1:51:16And they did that and they didn't get into the commodity business and they were brilliant. We don't need to be in this brutally competitive industry where like if we don't ship six months ahead of our competitors every cycle we're toast. Yeah. So I think you know, it's kind of like grading question. Oh man, the longer we do this show, the more I realize this is like a mega theme of acquired that like Microsoft in the 90s, early 2000s was such a power and the antitrust, you know, the DOJ case really, really crippled it probably for good for the ecosystem. Then the 3D chest version is and this kind of foreshadows the next episode because Nvidia had to learn these hard lessons and had to develop what was forced to develop these really crazy competencies like eventually developing CUDA that would power this whole machine learning and scientific computing revolution.

1:52:11Was it bad for Microsoft to not have to grow that DNA in the same way that it was bad for Microsoft to not have to grow the mobile DNA and Apple beat them at that game. Yeah, it's a great point. I don't know enough yet about how the machine learning market is going to develop or has developed in order to sort of make a call yet on that point. But if you're just standing there in 2006, reflecting back and video fought for their life and one.

1:52:40multiple times and Microsoft just leverage the crap out of their amazing position yes and probably achieved about the same outcome yeah both of these two fighting for their life company defining moments from Nvidia's first 10 to 15 years the overcoming the 90 competitors and then the building and making the case that they're not going to get commoditized by Intel that the GPU is going to be a standalone important thing. Microsoft profited hugely from both of those. Yep, it's so true. I will say Nvidia doing what they did has been net unbelievably positive for the world. Like I watched the Nvidia GTC conference the 2021 because the 2022 is about to happen.

1:53:28And just like the review of all the stuff they're involved in is so inarguably good for humanity. We need way less energy to do way more interesting stuff that's good for humans because Nvidia exists. And without doing this first 13 years, they would not have laid the groundwork to be able to do all of that in the future. So that's like one sort of contorted lens to look at it through. I think I give Nvidia for this period of time.

1:53:59A, because they're basically the only company that survived. ATI did a, for sure, of course, but in a very different fashion. And they created this whole industry, almost inarguably, created and shepherded this whole industry, but it's not an A plus because Microsoft, well shoot, there was the DOJ case. Until the DOJ case. Yeah, it's true. All right, I like that hard to argue with it. Carvouts?

1:54:29Carve it out, I have a fun and very appropriate one for this episode. Elden Ring. Have you heard about this, Ben? No. You're not a gamer, so you need to, we need to like get you into gaming after doing all these episodes now. It's so fun. It's just like, it's great. So Elden Ring, for people who don't know, is the latest from software game and it's on all the platforms, console, PC, et cetera. Lots of people are saying this is probably going to be is up there with the conversation for greatest game of all time ever made. These are the guys. It's Japanese developer. They made the Dark Souls games. If you've heard of them, they're like just these legendarily like incredibly hard games, but like the world building is unbelievable. And Elden Ring is the first one to come out on modern platforms and just like everything about it. The graphics, the scale, the breadth of the world.

1:55:27The story, George R. Martin helped develop the backstory to this. Oh wow. If you needed another example of how video games have become like the biggest, most ambitious storytelling medium out there, like this is it. I've only just started playing the game because I've been researching in video the whole time. Yeah. But even just in a few hours playing it, like it's incredible. You're not going to get an experience like this in anything else. Cool.

1:55:54I have an appropriate one that I didn't realize was going to be appropriate until you shared it earlier, which is I have been getting back into a lifting, like a weightlifting program that I haven't done for like 10 years. Inspired by Jensen. Called Starting Strength by Mark Ripeto. Yeah, apparently inspired by Jensen and I didn't even realize it. But it's like I reactivated a gym membership and I went back to the gym, you know, started kind of from square one in terms of like doing all the basic barbell lifts.

1:56:23It's just been really like it's a new hobby. It's something I did like 10 years ago and then totally let atrophy and the way that I love to work out and at least historically have the last five to eight years has been like endurance sports. So, you know, training for marathon or doing week-long bike trips and stuff like that. And it's just very fun to get back into the like every other day, try and, you know, lift as heavy as you possibly can for a few reps, rest for a long time, you know, make sure you get all your sleep. It's a very different mentality, and so it's been fun doing that again. I love it. It's like I feel like we're both becoming like better versions of our high school selves. I'm like a like a full on like gamer again and you're getting back in a way lifting high school me would have been like what why would I work out that doesn't sound fun. Okay college you college you fair. All right listeners that's all we've got we are very excited to at some point come back and talk to you about 2007 through

1:57:232022 within video and the absolutely unfathomable things that they have done. Imagine if you started a business in the early 90s doing a thing that seemed like a small market at the time but you did the thing and then it turns out that that gave you line of sight to something that the same technology was uniquely able to do that was like 10 times bigger than the original thing and no one else was even close to you because you had like 18 years of like building stuff and learning about these technologies to be the best company in the world to take advantage of that next thing which obviously is machine learning. It is just like an oh my god story and then you layer on top of that the fact that gaming actually was like 10 to 100 times bigger than anybody ever thought it would be. It's like a literally unbelievable story except that it happened so you have to believe it. So great. This is this is the kind of stuff that like we do acquired for. I just like been so jazzed about this.

1:58:22Yeah, I got a lot of research to do on parallel processing and like why this was so perfect for all the machine learning and cryptography use cases. But that's why we get some time between episodes to go and do more research and to watch GTC the GPU technology conference, their annual developer conference 2022. So thank you so much for listening to us. Leave us a review on Apple podcasts if you listen there or with the new Spotify ratings feature on their mobile app.

1:58:52Share with a friend if you liked it. We welcome lots of feedback. Unfortunately, in having a part two, we're going to be able to take your feedback and actually work it into the next part of the story. So acquire.fm slash slack. Come hang out with us. Talk about this. Check out the LP show. And we've got a job board. If you are looking for the next stage of your career, we have curated all of the positions at acquired.fm slash jobs. And with that, Thank you to Vanta, Vouch, and the Softbank Latin America Fund, and we will see you next time. We'll see you next time indeed.