--:-- Martin Casado: So maybe just to kick it off at a high level, let's talk about running a large operation both as a disruptor and through a market transition or transformation. I'll start with you, Raghu. When VMware came out, I remember it was the late 90s and I could run Linux on my Windows and it was the most amazing, magical moment. It really changed the industry. I remember when it became a $30 billion company, everybody was running it, it was a monopoly. But it also had to weather a number of transitions going forward. So maybe just a bit about mindset as a disruptor and then how you evolved that mindset as a leader and of the org as you have to go through transformation yourself.
--:-- Raghu Raghuram: Yeah, I would say if you look at VMware's roughly 20-year history, the first decade was us disrupting and growing, and the second decade was others coming after us to disrupt us. That's roughly the VMware history. There are three or four what I call weapons of mass disruption in our industry, especially on the infrastructure side. One is if we introduce a new piece of software that introduces a new abstraction, or a new usage model. Everything starts to aggregate around that. You are able to successfully bring about a new class of users that were previously not consumers. This is the classic innovator's dilemma description. Or a new business model.
--:-- Raghu Raghuram: In the case of VMware, we did the first and the last one. We brought about a new abstraction for the data center for compute, which was a software-based virtual machine. And we had a business model that associated software as opposed to hardware. That was the core of the disruption. Because of the benefits of software, we were able to fundamentally change the usage patterns in the data center. Once you start to change the usage patterns and the behaviors of the practitioners, you get locked in and the disruption is almost impossible to remove.
--:-- Raghu Raghuram: Those weapons of mass disruption were used against us, not intentionally. The two big ones we faced were cloud, and the second was containers and Kubernetes. In the case of cloud, all the same elements were present. Initially, Amazon, AWS did not change the abstraction of a virtual machine, but everything else changed. The business model changed. The most important change AWS brought about was it made infrastructure available to developers without IT. That was the massive unlock of a whole new class of users. And we had no idea how to work with developers. We did not know the secrets of how to do that.
--:-- Raghu Raghuram: Then Docker and Kubernetes changed the packaging and the abstraction. The interesting thing is the industry, nobody made money on either Docker or Kubernetes. There were some startups, but there was no big company created out of that. The real fundamental disruption we had to fight against was the cloud. The cloud disruption was so hard for us to fight because it brought in a new class of users for infrastructure.
--:-- Martin Casado: Cisco's been such an iconic company for so long. It really rode the internet wave and then it rode the data center wave. It's been incredibly successful at riding multiple waves. It feels like you can't make a wave, but once they happen, you can ride them and capitalize on it. We're clearly seeing one right now with AI. So it seems like a great opportunity for Cisco to figure out what to do. I'd love to hear how you're thinking about the waves that Cisco did miss, and how you're thinking about navigating this as a leader.
--:-- Jeetu Patel: The obvious one is we missed the cloud wave. If you take a step back, every large company that's successful has to have gone through a startup phase because every large company was a successful startup at some point. But what ends up happening is at some point when a company gets large, they lose touch with the front lines. You get into this mode where you get very good at the math of the business. Everyone knows what the gross margin of the company is. But you've lost the soul of the business, which is, are you innovating at a very impatient velocity so you can continue to discontinuously leapfrog? When that happens, you have to hit the reset button.
--:-- Jeetu Patel: I think about five, six years ago, that had happened for us. We had to hit the reset button. Let me tell you what needs to happen when you hit the reset button. You have to make sure you get people who have a founder's mentality.
--:-- Martin Casado: As execs in the company? Just throughout?
--:-- Jeetu Patel: Most of the people on my leadership team, a lot of them are ex-CEOs of acquisitions that we've had that are actually running these pieces. You have to have a combination of CEOs and people that know how to operate within the machine that is Cisco. The CEOs can put pressure by being impatient, saying, "This doesn't make sense, I'm not moving fast enough." And the people that know how to navigate Cisco are able to guide them through. If you can make a good team out of those two people, magic starts to happen.
--:-- Jeetu Patel: Where we've really started to see the tempo pick up is operating with a mantra that says, "Operate like the world's largest startup." Make sure you're operating at speed with scale. You have to have a great zero-to-one practice, a great one-to-100 practice, and a 100-to-1,000 practice. We're getting very good at saying, "In nine months, can you get a product from zero to market? And then in three to four years, can you get it to a billion?" If you can do that eight, nine, ten times, you've got a pretty healthy additive book of business that you didn't have before. You can either create a category or you can ride a category that's been created. It takes a little longer to create a category.
--:-- Jeetu Patel: I think large companies are very good at running many experiments. What they're bad at is doubling down on an experiment that works. That's where startups are good. They'll just focus on one problem. The other thing we usually see where things fail in a large company is if you read one too many TechCrunch articles, you will build a zero-to-one product that does not keep in mind your route to market. You have to make sure you can actually ride the route to market that you have. If I can build ten products that leverage my route to market, then I'm going to have an advantage in getting a disproportionate amount of velocity to market. If I don't leverage the route to market, and I try to build a new route to market for every single one, then the sales team is going to feel starved, and you're not going to get to the level.
--:-- Martin Casado: Okay, so let's think into this very specifically. I think many people don't appreciate how complex this exact thing is for a large company. You said something that I think is exactly right: large companies lose touch with the front lines. I think Steve Sanofsky has this great model where for any disruption, you have these incumbents. Let's say 80% of the dollars come from 20% of the customers, and those customers are large enterprise with very sophisticated needs. It drives so much of the business. They have these deep relationships with a few customers. A new disruption comes, and they're not with the front lines, which tends to be different. So now you've got to retool go-to-market, product, everything for this new base, even though 80% comes from the old. Raghu, you had to deal with this. How did you think about evolving the company, not only to disruption, but even just catering to a new base? The marketing side, the sales side.
--:-- Raghu Raghuram: What you said is spot on. When you're talking only to your best customers, by definition, that's not where the disruption is coming from. Like any other large company, you get really good at talking to your best customers, and that's where all the incentives are. Companies deal with it in one of two ways. One is they fence off a different team to go approach this thing completely differently, allowed to break every rule in the book. Or they go and buy. We have at various times done both.
--:-- Raghu Raghuram: There are certain classes of innovation where you can get by with close adjacencies. If you're building a product closely adjacent to your original product, you can take it from zero to one through the existing sales force because it's going exactly at the same user. But if you're going at a different user, like we were doing with NSX and networking, then you need to fence it off.
--:-- Martin Casado: It's so interesting about VMware. It's one of the few companies that actually did both pretty successfully. vSAN was storage, and you pulled it off. I don't know how. And then NSX was inorganic, and you pulled it off. I didn't know how. Any lessons on inorganic, organic, the complexities?
--:-- Raghu Raghuram: I think you have to be very careful where organic is going to work. Everything starts from the product. In the case of vSAN, to your example, it was a close adjacency to the compute.
--:-- Martin Casado: But it's a different buyer, right?
--:-- Raghu Raghuram: Yes.
--:-- Martin Casado: You tell me. You're the expert.
--:-- Raghu Raghuram: In fact, we had two iterations on vSAN. Initially, we said, "Let's go after the storage buyer." That did not work as well. Then we said, "We're going to expand the compute buyer's purview." Then it started working. The go-to-market started to match together. The other thing about going into existing categories is you've got to be 10x better. In the case of storage, we were 10x better than having an external storage, at least for VMware uses. That's why that worked.
--:-- Raghu Raghuram: That 10x better is a very counterintuitive thing for large companies to think about because they always think about catching up. No one wins by playing catch up. The asymmetry of coming at it from a different angle and being at least an order of magnitude better is something you have to continue to push at and be the biggest skeptic. Most people will tell you they're 10x better when they're actually 15% better. 15% doesn't create an extraction of an incumbent.
--:-- Raghu Raghuram: In the case of networking, it was a different way of operating a network. That was the value proposition. It was not necessarily 10x better. It was something that could not be done on a physical network at all. What do you mean you can program the network? What do you mean you can have virtual firewalls that scale? You really have to understand the nature of the disruption you're bringing to the market and then tailor the rest of the go-to-market around it. That's why we chose different approaches in both cases.
--:-- Jeetu Patel: The other thing I would say to what Raghu said is you have to define very clear insertion points.
--:-- Martin Casado: You mean in the market or in the company?
--:-- Jeetu Patel: In the market. If you have an incumbent that's already in the market that's entrenched pretty well, a large company will typically try to say, "I'm going to go out and build something for the greenfield with an entire platform." But the reality is the market's not greenfield, it's brownfield. You have to identify an insertion point where your competitor might be there. Over time, you have to make sure you extract the competitor, which is not intuitive to people. It's like, "Oh, I'm going to compete with them." No, you actually have to coexist first before you can displace. That requires a very open ecosystem-based mentality, which large companies sometimes can tend not to have.
--:-- Martin Casado: One thing I've seen fail consistently is this notion that if an engineer spends one day a week experimenting, maybe they'll come up with a great idea that changes the company. That tends to not have enough momentum behind it to do something big. I've also seen fail is taking one large org and saying you've got to do two things: the new thing and the old thing. It's just too hard. What seems best is ring fencing. I think Cisco in particular has a lot of experience with this. How do you think about structuring it if you're doing something disruptive organically?
--:-- Jeetu Patel: The way we structure it is you start with a two-pizza team initially. Really small. That team has agency. That team has air cover from the very top, all the way up to the top of the food chain. Because there are enough antibodies that'll argue why it's not a good idea and it should be part of the core, you have to make sure that team is protected from that and is just focused on driving it.
--:-- Jeetu Patel: They might be good at getting a version one product out to the market, but they are not going to be good at getting the entirety of the sales force of 17,000 sellers in Cisco's case to go out and get it. So you have to be very prescriptive of an ideal customer profile that you want to start this with. This is one of the best ways to not lose touch with the front lines. You start with a zero-to-one project from the bottom. You never start a zero-to-one project from the largest financial services institution. You start from the bottom. You give that team enough freedom and agency, and over time construct enough incentives in the different teams for making that thing successful. When that happens, you start to see a snowball effect, but it takes a while.
--:-- Jeetu Patel: One of the things we learned that failed the first couple of times we did this was we'd have the version one of the product out and then the field would just reject it, saying, "It's not ready. It's not a complete product." No, it's actually ready for this segment of the market.
--:-- Martin Casado: Would you do an overlay to help?
--:-- Jeetu Patel: We would have an overlay sales team. But the core would keep it out of the account because it's like, "Yeah, it's not going to go sell at Bank of America." I'm like, yes, that's actually the wrong account to go sell it in as a version one product because it's not ready for all of the capabilities needed there. I don't need to have a data center in China for my first billion. So being very clear on where you're going to make sure that you...
--:-- Jeetu Patel: What we do now is when you have an incubation team, they have two jobs: build a great product and define an ideal customer profile. Make sure that in that ideal customer profile, you have initial adoption and a repeatability of a go-to-market opportunity creation motion after you've got the product-market fit very clearly defined. Once you've got that ICP nailed and you've saturated that market, expand the ICP. Then expand it again and again. That's a very counterintuitive motion for large companies because it's very hard to go to 17,000 sellers and say, "You 1,000 of the sellers, I'm only going to train you on it."
--:-- Raghu Raghuram: I think the term "ideal customer profile," especially in larger companies, misleads people into thinking, "Oh, my customer is JP Morgan, my customer is Home Depot." That's the ideal use case profile. It's the ideal practitioner profile. You've got to narrow cast it down to who's the person that's going to wake up every day using that thing you're going to build. Revolve all of your practices around that from go-to-market into product.
--:-- Raghu Raghuram: I will tell you this: once you start building products that start getting momentum in a large company, the company starts regaining a spring in their step. I think Cisco is going through this right now.
--:-- Jeetu Patel: Yeah, Cisco's got its mojo back.
--:-- Martin Casado: Stock at all time high. Congratulations.
--:-- Jeetu Patel: Well, you never know how these things go up and down. But in general, we're pretty excited about the reception in the market. The most gratifying thing is when you go into the internal audiences and you can feel the spring in the step of the employees. Why is that? Because we're starting to win again. Most people want to come into the office wanting to win. But when you have 95,000 employees, you can tend to dissipate a message very quickly.
--:-- Jeetu Patel: One of the best pieces of advice I was given, one of my board members when I took over this job as head of product, he pulled me aside. He said, "I'm going to give you one piece of advice." He was the ex-CEO of Northrop Grumman. I said, "What's that?" He said, "Don't delegate the storytelling to anyone in the company. You go do it yourself because you need one voice." It doesn't mean I'm the best presenter in the world. But if one person doesn't tell the end-to-end story who actually owns it, you start to fracture the story. Once you fracture the story, you start losing control of it. The story is so important. The best in the world at this is Apple. You just want to be 10% as good as Apple. We're really getting obsessed about that. It's starting to work because the clarity with which you can galvanize 95,000 people, when that starts to happen, you can start to feel a tempo in the business that's just very different.
--:-- Raghu Raghuram: In fact, I'll go one step further and say the story is the strategy.
--:-- Jeetu Patel: That is the strategy.
--:-- Raghu Raghuram: Human beings, 95,000 people together, are not going to understand five bullets. It is a story.
--:-- Martin Casado: Something unique to this AI wave that you've certainly seen, Raghu, and maybe you saw a little bit of Box, is this kind of consumer, prosumer movement. The internet was that. Netscape was that. Actually, VMware was that. You paid $199 and then $249 and downloaded the product. I did it as a college student. A lot of the companies being impacted are not consumer companies. They're deep enterprise companies. How do you think about navigating a wave where the buyer is not just the ICP for the actual consumer? Do you sell to the people who sell to them?
--:-- Raghu Raghuram: I think firstly, the danger for enterprises, even for startups, is to look at this AI wave through the lens of previous waves. There are some applicable lessons, but this thing is so big and so different that you've got to look at it from first principles. It's particularly dangerous because we have old AI chatbot things that are actually quite different, but we're used to thinking about the old AI, not the new. It rhymes with previous stuff, so it makes us think. Whatever OpenAI did broke every single rule of what was done previously, and they've wildly succeeded. This is the new skill for companies to learn.
--:-- Raghu Raghuram: Especially infrastructure companies or application companies, you've got to almost ignore IT. That chain of selling to the seller who sells to the buyer internally is forever broken. SaaS broke it, but AI breaks it even further. What that means is your product managers and everybody else trying to figure out what the product is has to really think about the end user from a direct reach point of view.
--:-- Martin Casado: There are different buyers. You can sell to IT, or you can sell to security or marketing. But this is literally individuals with credit cards. Even developers are a bit of a central buyer that we understand how to sell to. But this is a random employee asking ChatGPT to write an email. It's very different. It seems like Cisco has been able to navigate these because the network is such a point of leverage. If every user uses something, the network TAM grows. One option for Cisco is you have a new data center, you sell a new switch. It doesn't matter that a lot of the market is a consumer phenomenon. Is that the way?
--:-- Jeetu Patel: The way we think about ourselves is we are the critical infrastructure for the AI era. You have to look back and say, where is AI constrained right now? It's constrained in power. It's constrained on compute. It's constrained on the network. If the packet is delayed getting to the GPU, the GPU is idle. That's like burning money, especially in the training runs. You have to make sure you have a very efficient packet flow. Low latency, high performance, high energy efficiency infrastructure on the networking side is super important on training.
--:-- Jeetu Patel: As you have more agents in the work, your inference demand is not going to be spiky. It's going to be sustained. Today, an agent probably works autonomously for 20 minutes. In the next six months, it'll work autonomously for maybe two hours or ten hours. Then it'll work for two months, then two quarters, then two years. The longer it works, you have a sustained, persistent demand for inferencing. Your capacity of network appetite is going to go up quite exponentially. If you have 1,000 employees and you add 10,000 agents, that's like having 11,000 employees. You have to have your network bandwidth be equivalent to what can serve 11,000 employees. You're going to need more infrastructure. We are a direct benefactor of that.
--:-- Jeetu Patel: The second area is keep it safe and secure. Securing AI is going to be pretty important. We have a core foundation on the safety side. Those two become core foundational elements of the infrastructure. The third one is data, and we've got Splunk. You have to find those foundational elements that say no matter what happens on the business model, people are going to need infrastructure. The beauty for an infrastructure company is your business model is not that complicated. As there's a spike in demand and applications, you're just going to need more infrastructure, and you have to continue to sell the infrastructure to the people building it.
--:-- Raghu Raghuram: Infrastructure traditionally has followed usage models. Back to your consumer thing, you really have to understand the usage pattern, whether it's human beings typing in chatbots.
--:-- Jeetu Patel: With Cisco, it's also just good to be king. If you're in the network, whatever compute grows, the network grows. But it's not always that way. It's great to have share, but if you stop innovating, you can actually start to see customers get frustrated. For about a six or seven-year period, we had just stopped innovating. I just don't think it was that productive for us. Getting back out to innovation right now, in the past 18 months, we've probably done more innovation than the previous 10 years combined. Our biggest challenge right now is sitting down with the customer and giving them the story that says, "Here's where the innovation has happened." When you sit down with them for 90 minutes, they love it. Doing that for a million customers is really hard. At scale, changing perception is hard. It took us about a year and a half to do that.
--:-- Martin Casado: One thing that's interesting about this, Aaron Levy was sitting in that seat, one of my best friends. He brought this up, which I thought was really good. During this wave, you have a lot of the original founders still running the companies. You've got Zuckerberg, you've got Jensen, you've got Ollie Goetze. A founder, we've seen many times with the Reed Hastings effect, can navigate a transformation because they know the team, they are product focused, they have the moral authority, they have support from the board. When you joined, VMware, Diane was still running it, right? You were there. You've actually seen the founders do it. But you were CEO as a non-founder. You guys have worked with non-founders. Do you think it's a different job?
--:-- Raghu Raghuram: There are a couple of things where a founder has a unique license. But then there's the rest of it, which is how do you make the change happen? How did I think about it? I was CEO. I'd been in the company so long, maybe I was virtually a founder. The first element is, what is the technical and product credibility and license that your team is giving you? In my case, fortunately, I'd been there for a long time and driven a lot of the waves VMware had gone through. So I had some of that.
--:-- Raghu Raghuram: The other important thing you need is early conviction on what to bet on. Founders get much more time. The market gives them more time. Their board gives them more time. Their employees give them more time. Non-founders, for various reasons, don't get the same amount of time. So what you've got to do is develop very early conviction about what the bet is that is going to drive this transformation. Then what is the narrative behind it, to your point earlier? And then how do you drive that into every aspect?
--:-- Raghu Raghuram: The other part of it that you've got to do, which founders naturally do, is—I mean, the overused phrase of the year is probably "founder mode," right? You really have to own that change, every little aspect of it, right from every check-in to how it gets to the market. So those things are all common. But you're absolutely right. Founders have a better ability to do that because they are founders and natural entrepreneurs.
--:-- Jeetu Patel: I have a slightly different take. I agree with everything Raghu said, but I also feel like I've never been a founder. I have never felt like I'm not a founder of any company I worked for.
--:-- Martin Casado: You sure feel like a founder.
--:-- Jeetu Patel: I feel like I founded Cisco, and this is my company, and I'm going to make sure that we make it successful. I think that owner's mentality is actually more important than being a founder. The way I think about the owner's mentality is you have to be extremely impatient. You always remind yourself you're running out of time. You always market in rather than company out. You don't tolerate any level of mediocrity, and you don't try to win a popularity contest because you'll never win it. Especially the larger the company gets, it's a very dangerous trap to fall into because a lot of people will tell you what you want to hear. You almost have to work hard to surround yourself with people that are excessive critics, people who look at everything that's wrong with you and keep nitpicking. You need some of those people around you so that you are constantly getting better. But I feel like I've never been a founder, and I always feel like I'm an owner of the company I'm in.
--:-- Raghu Raghuram: The other thing is, I think finding the truth is especially hard in a large company. That's another place where I think founders can get to the bottom of things more easily.
--:-- Jeetu Patel: That's a really important point. In large companies especially, we start to create versions of the truth and then start believing those versions of the truth. That happens so frequently. Seeking the truth and going down to the facts of what is not working—especially at a company like Cisco, one of the things Cisco is really amazing at is a very compassionate culture. One of the things Cisco is not that great at because of that compassionate culture is we might not actually have very direct conversations sometimes. So you have to make sure that when something is not good, you sit people down and say, "We're failing." You have to use binary language. "We're failing in this area. These are the three things we need to do to succeed. And if we don't succeed, there's an existential threat. I need and expect you to do this to make sure that happens." It's very unnatural for people when someone comes in and starts doing that initially. You have to break every mode of hierarchy.
--:-- Jeetu Patel: I'll give you an example. When I first joined, I said, "Let's start doing design reviews with the WebEx team." And they said, "What are you talking about? You're a member of the executive leadership team. You're too senior. We don't need to do design reviews." Then they started doing design reviews, and the senior vice presidents would come in and do design reviews with me. I said, "No, I need to make sure that the designer and the PM and the engineer are actually doing the design reviews." So then they started doing eight meetings for prep before they came to me because every layer would be the prep. That is a very common disease.
--:-- Martin Casado: Yeah.
--:-- Jeetu Patel: One of the guys who was there, his name is Ty, a great engineer, said, "Stop this madness. We're going to learn when G2 learns. This is a safe space. All of us are editors. We keep our titles out. Let's just make sure that we edit the code that's going to ship." The moment that happened, there was an unlock in the team. Everyone started thinking differently. It became a safe space, and we were just critiquing each other's ideas. They were telling me I was wrong. I was telling them they were wrong. We were just debating back and forth. The titles were left outside the room, and it created this magical dynamic where purely the best idea wins. In a large company, best idea wins happens very seldom. So you have to fight that urge to say rank wins. The best idea has to win.
--:-- Martin Casado: It just occurred to me—I don't know why it didn't occur to me before—that both of you are product people.
--:-- Raghu Raghuram: Of course.
--:-- Martin Casado: Nothing against people with other specialties—they're all phenomenally difficult to acquire expertise in. But you cannot navigate this AI transformation, or any other transformation, if it doesn't start from the product.
--:-- Jeetu Patel: I think so. That's very interesting.
--:-- Martin Casado: Do you manage from product on out?
--:-- Jeetu Patel: Absolutely. I'm very public about this. I think the product is the soul of the company. When we start thinking about the products, Cisco used to be a very sales company. John Chambers was the consummate sales guy. What I give Chuck a lot of credit for is he said we have to become a product company.
--:-- Martin Casado: Really?
--:-- Jeetu Patel: Yeah. Chuck's a sales guy by trade. And he said, "Jeetu, we have to make Cisco a product-led company, and you have to start from the product." Every single time a product guy started complaining about why the salesperson wasn't selling well, he said, "If you build a good enough product that has market pull, you're never going to complain about enablement. If you build a product that cures cancer"—one of my mentors used to tell me this—"you sell it in the Himalayas from 2:30 to 3:30 PM on Tuesday afternoon, every third Tuesday of the month, there will be a line out the door." Because you're curing cancer. So you have to build a great product and make sure there's enough pull. I feel like we are probably 70% of the way there now at Cisco, where everyone originates by thinking about what the product is and how we're going to add value.
--:-- Raghu Raghuram: I feel like companies go through three stages: the product stage, the sales stage, and the operations stage. There are actually leaders for each one of these stages. The same person can do all of them, but they have very different requirements. The danger zone seems to be having an operations CEO during a transformation, because it's such a product play and they have to reset. I do think that founders tend to always be product because you have to go to that stage. Product leadership is so critical.
--:-- Jeetu Patel: I do find that if you look across any large Silicon Valley company, or outside Silicon Valley, where leaders have successfully navigated a transition, I don't think you can think of an example where it wasn't product-led. Maybe 90% of the time. There are a few people touched by divinity like John Chambers, but very few. The one thing I've never understood in large companies is the formula that definitively does not work: saying, "I'm in a tech space, and I'm going to cash cow this business and not innovate, and I think I'm going to do great." That never plays out in the long term. But it is so common.
--:-- Martin Casado: It becomes a self-fulfilling prophecy.
--:-- Jeetu Patel: 100%. It does. Just keep innovating. It's a very simple formula. Just keep outdoing yourself and doing better every day. We have this line internally: just get 1.27% better every day from what you were yesterday, and in a year you'll be 100x better. There's a power of compounding.
--:-- Martin Casado: I'd love, Raghu, your thoughts on the AI stuff. I know it's pretty early. Do you think this changes infrastructure? Do you think it's largely independent of infrastructure? Do you think this increases TAM? How do you think about this on a macro scale?
--:-- Raghu Raghuram: I think it changes infrastructure in an enormous way. Infrastructure always follows the change in workload. Go back to Netscape. When the browser came out, we were running on 4.8 kilobit modems. Look at the internet infrastructure today. I remember the transition from the wiring closet to the data center.
--:-- Martin Casado: Exactly. Those mega data centers drove switching.
--:-- Raghu Raghuram: The neural net was created on a gaming chip. Today, you've got AI factories. Like you said earlier, the bottlenecks are progressively moving every way. I think fundamentally, every layer changes. It's not just compute. High bandwidth memory changes. Networking changes. Storage access patterns are changing. Every part of what we think of as conventional infrastructure is changing. The layer below that is changing as well. This whole business at the end of the day is power to tokens. Everything in between power generation and the token output is dramatically changing.
--:-- Martin Casado: Do you buy that this is a 10x step up in market size?
--:-- Raghu Raghuram: It's a 10x step up in market size because the applications are 10x step up in market potential. They're replacing labor. They're GDP-enhancing. Previous generations had tremendous advances in productivity, but not to this scale. I think infrastructure, from a market size as well as a scale perspective, is more like 100 to 1,000x, not 10x. You'll find probably two to three orders of magnitude.
--:-- Jeetu Patel: One of the things we are extremely obsessed about is that when you do something like this, vertical integration is super important. We build our own silicon ASICs. We have our own network infrastructure. We have our own security platform. We've got our own models that we're building in certain cases because I think the models are going to get smaller and more bespoke. We have our own data platform. We have our own observability stack. Working well together, but being completely open to the ecosystem, is super important in AI. Those structural changes on how companies think about an open ecosystem will be challenged quite a bit because you have to partner with your largest competitors and be unapologetic about it. You can't let internal forces stop you from doing that. One of the best things we've done in the past five years is we've completely opened up to our competitors. Microsoft Teams was a huge competitor for us. We partnered with them and have them run natively on our devices. Hundreds of millions of revenue has accreted because of that. That wouldn't have happened if we had not opened up. The lesson I've learned is: when someone owns more than 20% share in the market and you don't integrate with them, you're just excluding yourself from the market. You're not doing anything to displace that vendor. In AI, that's going to get even more prominent.
--:-- Martin Casado: That is great advice. That's why I asked Raghu whether I could insert into the hypervisor, and he ended up buying the company. That was the only way it was possible. Because he said no.
--:-- Raghu Raghuram: By the way, on your point about vertical integration, I think that's an interesting industry debate. If you look at the last two industry waves—the PC and the cloud—it was all about horizontal disaggregation.
--:-- Jeetu Patel: Maybe. It's a timeline question. They horizontally started. Google makes chips now. So over time...
--:-- Raghu Raghuram: Completely agree. That's where I was going.
--:-- Jeetu Patel: Okay, sorry. So now in this wave, it's soup to nuts. We'll see if this is the right model.
--:-- Raghu Raghuram: Yeah, for sure.
--:-- Jeetu Patel: We are starting on cybersecurity. We are starting to etch security into the silicon. It will have a very different performance output than what you'd have otherwise.
--:-- Raghu Raghuram: Totally. I do think there are signs of horizontalization also in this AI wave. For example, open source AI models are actually pretty successful. There are separate inference platforms. I don't think the vertical versus horizontal has played out yet. It's just so fast and so furious.
--:-- Jeetu Patel: That's why you have to make sure that if you do the vertical, you have to be very horizontally friendly.
--:-- Martin Casado: That was a great point. So listen, we're coming to the end of the time. We've got two of the most storied execs in infrastructure. A lot of people listening are in companies navigating this transition. Maybe they're not as big as VMware or Cisco. Just a few words of guidance on how to think about navigating these opportunities.
--:-- Jeetu Patel: I'll speak to the founders, which I think is the heart and soul of America and the world—the startup ecosystem. It's really important that we keep it vibrant. I have a six-part formula on what's really important in descending order for building a great company. Number one, the most important thing, is timing. Get the timing right. Don't fight the mega trend. Make sure everything you do has AI as a tailwind. Otherwise, you're not going to win. Number two, go after a very large market that you can attack a step at a time. If you try to swallow the entire market, it's going to be really hard. Address a large TAM a step at a time. Ideally, create the TAM. Don't go after an existing TAM. Number three is team. People often say team trumps market. I actually think market always trumps team. This is not my idea, this is Marc Andreessen.
--:-- Martin Casado: I agree. I think that's Valley consensus.
--:-- Jeetu Patel: It's consensus right now. Market always wins. Number four is product. Build a great product. In my mind, there are three parts to a product. Build a product that people love, that they talk to their friends and family about, because that's the only way you get to hundreds of millions of users. Number two, get adoption and really understand retention and why it happens. Number three, get to commercial relevance. Otherwise, it's a science experiment. So timing, market, team, product. Number five is brand. Build a brand that's identifiable. Don't have too much noise in the system. Just one message over and over again. Number six is you've got to have scale distribution. Otherwise, it doesn't work. We don't have time to explore it, but the last two are very, very different today than how you do it. This is a challenge for large companies. This very medium we are on turns out to be one of the biggest brand-building mediums ever. It can't be too scripted. That's the problem. Authenticity is a big thing.
--:-- Jeetu Patel: The last thing for people looking at these disruptions that seem a little bit scary: in my experience, there's a lot more opportunity than not. Run towards the fire in this case. When people say the AI thing is going to make humans irrelevant—we are so far from a point where humans are not going to be able to add value to society. Once cancer is solved and I can simply pay my taxes, then we can have a conversation.
--:-- Martin Casado: I have to pinch myself saying, "Are we actually having this argument?" Because right now I can't write a full board presentation with AI just yet.
--:-- Jeetu Patel: Until I can go to the DMV easily. Come on, man. Forget a board presentation—even a careful email. A very careful email you would send to a customer to close a deal. There's a lot of upside.
--:-- Martin Casado: Well, listen, thank you so much for joining us. This was a lot of fun.
--:-- Jeetu Patel: Absolutely.
--:-- Martin Casado: Thanks for listening to the a16z podcast. If you enjoyed the episode, let us know by leaving a review at ratethispodcast.com. We've got more great conversations coming your way. See you next time.
