By Andrew Macken
Let me share with you a story about a company, ‘Alternative Man’, that produced an elixir so powerful that everyone in the world wanted to drink it.
Alternative Man had spent many years and billions of dollars developing this potent and powerful elixir. It was one of the most talked-about companies in the world. The best elixir scientists wanted to work there. Customers were loving the elixir’s powerful effects.
But Alternative Man’s business model was capital intensive. Despite having an amazing recipe, it cost a lot to develop and future improvements to the recipe were becoming increasingly costly. Manufacturing was also expensive. And although customers paid up for their regular hit of the latest elixir, the company was loss-making.
Still, VC funds, as well as the Alternative Man’s manufacturing and recipe-development partners, continually stepped up to supply the capital needed by the company.
Then one day a company called ‘Ice Bergs’, the world’s largest distributor of medicine with more than 3 billion customers, published its own elixir recipe for the world to have – for free! Anyone could take the recipe, mix up the ingredients, and drink it to unlock its amazing powers – almost akin to the effects of Alternative Man’s elixir.
Furthermore, Ice Bergs had far more resources than Alternative Man, including:
- Enormous sources of internal capital (helpful for elixir development, and talent attraction and retention);
- Large-scale access to privileged ingredients that no one else had;
- Vertically integrated manufacturing, enabling Ice Bergs to produce its own elixirs at much lower unit costs; and
- Billions of existing customers, substantially reducing the need for costly marketing.
Bizarrely, while Alternative Man was valued at $157 billion by VC firms, the stock market values Ice Bergs’ internal elixir division at zero – because it was hidden amongst a much larger medicine distribution business (and gave away its elixir recipes for free).
OpenAI versus Meta
Of course, in this little allegory, Alternative Man is OpenAI, creator of the wildly popular ‘GPT’ AI models. And Ice Bergs is Meta, who produces the powerful ‘Llama’ AI models open-source – meaning they are freely accessible for anyone to use.
Like Ice Bergs, Meta appears to us to be in a far more competitively advantaged position than OpenAI:
- Meta has enormous scale advantages in access to privileged data (required to train the AI models)
- It has large internal compute capabilities (which is lower-cost than paying an external cloud provider)
- And Meta has direct channel to more than 3 billion captive individuals around the world who already use Meta’s services each month.
OpenAI, on the other hand, does not have any of these attributes today.
Buy business advantages, not elixirs
An investment in Meta today feels very different to an investment in OpenAI (which can still only be done privately since it’s not listed).
While Meta might not ultimately generate a higher return than an investment in OpenAI, we think it is far more probable that Meta will generate at least a decent return.
OpenAI is more akin to buying a lottery ticket – the range of possible outcomes, both good and bad, is much wider.
At Montaka, we would prefer to own Meta. And indeed we do. (Incidentally, through Montaka’s position in Microsoft, we also have some look-through exposure to OpenAI).
This goes to the heart of how we are investing in AI: we are seeking to own business advantages, not elixirs.
That is, we are focused on the business attributes (such as scale, customer captivity, and ‘flywheels’) that create sustainable long-term value which are near-impossible for competitors to recreate, rather than new seemingly magical AI models that can be eclipsed by a rival at a moment’s notice.
Andrew Macken is the Chief Investment Officer with Montaka Global Investments.
To learn more about Montaka, please call +612 7202 0100 or leave us a line at montaka.com/contact-us
Note: Montaka is invested in Meta & Microsoft.
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