To Cozy Up With Elon Musk, This VC Has Invested Billions

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[00:00:34] [SPEAKER_03]: Welcome to Tech News Briefing. It's Wednesday, September 11th.

[00:00:38] [SPEAKER_03]: I'm Zoe Thomas for the Wall Street Journal.

[00:00:41] [SPEAKER_03]: Oracle arrived late to cloud computing and its trailed competitors Microsoft, Amazon and Google in the space.

[00:00:48] [SPEAKER_03]: But in the artificial intelligence boom, that delayed entry could be the key to its success.

[00:00:54] [SPEAKER_03]: We're going to tell you why.

[00:00:56] [SPEAKER_03]: And then, to get into Elon Musk's orbit, two investors have essentially committed their venture firm to serving him.

[00:01:05] [SPEAKER_03]: Our reporter Berber Jinn will bring us that story and tell us what it says about Silicon Valley investing.

[00:01:14] [SPEAKER_03]: But first, Oracle built its name on relational database software.

[00:01:19] [SPEAKER_03]: Its future could be more about AI.

[00:01:22] [SPEAKER_03]: That's because the 47-year-old tech giant has carved out a place for itself,

[00:01:27] [SPEAKER_03]: providing cloud services to companies training AI models.

[00:01:31] [SPEAKER_03]: These include notable players in the space like OpenAI and XAI.

[00:01:36] [SPEAKER_03]: Here to tell us more is our reporter Tom Ditton.

[00:01:38] [SPEAKER_03]: Tom, Oracle was behind other big players in building out its cloud computing business.

[00:01:43] [SPEAKER_03]: But you're reporting that may have given the company a late mover advantage. How so?

[00:01:49] [SPEAKER_02]: That's a story that they're trying to get across to investors.

[00:01:51] [SPEAKER_02]: They entered the cloud almost a decade after Amazon and then later Microsoft and Google got into cloud.

[00:01:57] [SPEAKER_02]: And for a long time, they were seen as this dinosaur that had missed out on this revolution of cloud computing.

[00:02:03] [SPEAKER_02]: So they finally get around to it in 2016 and they're still far behind.

[00:02:08] [SPEAKER_02]: The scene has taken off. Every other company's grabbed huge market share.

[00:02:11] [SPEAKER_02]: But the advantage that they claim that they have now is that a late entry means they have more modern equipment, more modern design.

[00:02:17] [SPEAKER_02]: Their data centers are optimized for this moment that is going on right now in artificial intelligence.

[00:02:25] [SPEAKER_03]: Unlike other cloud providers, Oracle isn't developing its own large language AI models.

[00:02:30] [SPEAKER_03]: How has that position affected its ability to attract clients?

[00:02:33] [SPEAKER_02]: Them not being in the large language model building game benefits them in a couple of ways.

[00:02:38] [SPEAKER_02]: One, it makes them seem non-competitive.

[00:02:41] [SPEAKER_02]: You have companies like Microsoft, like Amazon and of course Google who are partnering with a lot of startups

[00:02:47] [SPEAKER_02]: but are also building models that are technically in competition with them.

[00:02:50] [SPEAKER_02]: And so you may not exactly want to bring your proprietary technology to a cloud computing company

[00:02:55] [SPEAKER_02]: that is building the kind of model that's competing with you.

[00:02:58] [SPEAKER_02]: And the other thing is resources.

[00:03:00] [SPEAKER_02]: These companies that are building their own models, they have to build it on their own cloud computing infrastructure.

[00:03:05] [SPEAKER_02]: And that takes up a ton of space, a ton of capacity, uses up the GPUs.

[00:03:09] [SPEAKER_02]: And there's often these fights going on inside these companies.

[00:03:12] [SPEAKER_02]: I'm talking about the big cloud companies over whether they should make capacity available to internal projects or to clients.

[00:03:18] [SPEAKER_02]: And Oracle's, their argument is like, well we're not building that.

[00:03:21] [SPEAKER_02]: So everything that we have more or less on offer is stuff that is for customers.

[00:03:26] [SPEAKER_03]: On Monday, Oracle said it signed a contract with Amazon Web Services that would allow customers to access its database infrastructure.

[00:03:34] [SPEAKER_03]: What does that say about the company's strategy when it comes to competing in AI infrastructure?

[00:03:39] [SPEAKER_02]: That's another good example of how they're non-threatening to people because they're not necessarily the biggest player in town.

[00:03:46] [SPEAKER_02]: So they sign this deal with AWS that lets Oracle's database run inside Amazon Web Services servers.

[00:03:52] [SPEAKER_02]: And it's actually the third one of these deals that they've signed.

[00:03:55] [SPEAKER_02]: They previously did one with Microsoft, with Azure, and they did one with Google Cloud.

[00:04:00] [SPEAKER_02]: And so they have all three major cloud providers offering the same service here,

[00:04:04] [SPEAKER_02]: which is pretty interesting to have the competitor to all three of them still willing to strike a partnership

[00:04:09] [SPEAKER_02]: to run their databases inside their servers.

[00:04:12] [SPEAKER_03]: So what do investors make of Oracle's position now?

[00:04:15] [SPEAKER_02]: Well, we saw with the earnings on Monday that things are looking pretty optimistic for them.

[00:04:20] [SPEAKER_02]: They are one of the best performing tech stocks this year,

[00:04:23] [SPEAKER_02]: outperforming companies that otherwise had been seen as like the great winners of the AI moment like Microsoft and Amazon and Google.

[00:04:30] [SPEAKER_02]: And there is this belief among investors finally, for now, that they have turned a corner.

[00:04:37] [SPEAKER_02]: AI revenue only makes up 15% of their cloud business in fiscal year 2024.

[00:04:43] [SPEAKER_02]: And their cloud business is only a portion of their overall business.

[00:04:46] [SPEAKER_02]: So we're talking a fairly insignificant part of their business coming from AI.

[00:04:51] [SPEAKER_02]: But if you're an AI bull, then Oracle is decently positioned there.

[00:04:54] [SPEAKER_02]: And this could end up being like a major tailwind for them.

[00:04:57] [SPEAKER_03]: What are some of the risks then to Oracle in this space?

[00:05:00] [SPEAKER_02]: The skepticism from some people still is that the revenue that they're bragging about

[00:05:05] [SPEAKER_02]: or the business that they're bragging about from AI is potentially transitory.

[00:05:10] [SPEAKER_02]: And it rests on broader questions of whether or not you believe AI is going to be a big thing.

[00:05:17] [SPEAKER_03]: That was our reporter, Tom Dutton.

[00:05:20] [SPEAKER_03]: Coming up, to get a seat at the proverbial lunch table with Silicon Valley's popular crowd,

[00:05:26] [SPEAKER_03]: these investors gave a lot of money to Elon Musk's startups.

[00:05:31] [SPEAKER_03]: We'll tell you how that worked out after the break.

[00:05:43] [SPEAKER_03]: What would you do to get close to the world's richest man?

[00:05:48] [SPEAKER_03]: John Herring has put a lot of his time and money into cozying up to Elon Musk.

[00:05:54] [SPEAKER_03]: Together with Alexander Tomas, Herring runs VY Capital, which is invested heavily in Musk's businesses.

[00:06:01] [SPEAKER_03]: Despite that, neither of these investors has a board seat at any of Musk's companies.

[00:06:06] [SPEAKER_03]: So what does this tell us about Musk and Silicon Valley investing?

[00:06:10] [SPEAKER_03]: Our reporter, Berber Jinn, is here to tell us.

[00:06:14] [SPEAKER_03]: Berber, through a spokesperson, John Herring and Alexander Tomas declined to comment.

[00:06:19] [SPEAKER_03]: But you've spoken with dozens of investors and people close to these men.

[00:06:23] [SPEAKER_03]: What do we know about them and how their firm VY Partners got started?

[00:06:28] [SPEAKER_01]: Alex and John, they had a very different path before they met each other.

[00:06:32] [SPEAKER_01]: Alex was born in Romania and he got his start working at Goldman Sachs in London.

[00:06:39] [SPEAKER_01]: And he got his big break in 2008 when Yuri Milner, a very well-known Russian-born venture capitalist,

[00:06:47] [SPEAKER_01]: hired him to work at DST Global, which is a very large established venture firm today.

[00:06:53] [SPEAKER_01]: And at DST, Alex helped lead an investment in Facebook in 2009,

[00:06:58] [SPEAKER_01]: which today is seen as one of the best VC deals of all time.

[00:07:02] [SPEAKER_01]: And that kind of propelled his career.

[00:07:04] [SPEAKER_01]: He founded VY Capital in 2012.

[00:07:08] [SPEAKER_01]: He hired John Herring in 2015.

[00:07:14] [SPEAKER_01]: So at the time, Herring was not nearly as established as Alex was.

[00:07:19] [SPEAKER_01]: He had co-founded a mobile security startup called Lookout.

[00:07:24] [SPEAKER_01]: He very famously in 2005 successfully scanned into the cell phones of celebrities at the Academy Awards.

[00:07:32] [SPEAKER_01]: He kind of turned that publicity stunt into a startup that raised hundreds of millions of dollars under his watch.

[00:07:41] [SPEAKER_01]: It wasn't the sort of breakout success that he was hoping for.

[00:07:44] [SPEAKER_01]: And so he was looking for his next act in Silicon Valley.

[00:07:49] [SPEAKER_01]: So he teamed up with Alex in 2015 and they initially envisioned VY to be this global tech investment firm.

[00:07:58] [SPEAKER_01]: Alex likened it often to Warren Buffett's Berkshire Hathaway.

[00:08:04] [SPEAKER_01]: And John initially was tasked with basically turning VY into a really hot Silicon Valley venture firm.

[00:08:11] [SPEAKER_01]: That vision didn't materialize, but they had this very powerful lifeline in Elon Musk.

[00:08:19] [SPEAKER_03]: A lifeline into Elon Musk.

[00:08:20] [SPEAKER_03]: I mean, their venture capital firm, VY, is a really big backer of Elon Musk's startups.

[00:08:26] [SPEAKER_03]: How much have they put into these companies?

[00:08:28] [SPEAKER_01]: So they've poured billions upon billions of dollars into Musk's companies.

[00:08:33] [SPEAKER_01]: They're definitely one of the largest investors in Musk Inc. in recent years.

[00:08:39] [SPEAKER_01]: What's even more striking is just the proportion of their investments that are in Musk's businesses.

[00:08:46] [SPEAKER_01]: Based off filings from earlier this year, more than half of their assets are parked in Musk's various startups.

[00:08:52] [SPEAKER_01]: And so that's extremely unusual.

[00:08:54] [SPEAKER_01]: Other firms like Sequoia and Valor Equity Partners, they're also big Musk investors,

[00:09:00] [SPEAKER_01]: but the fate of their firms aren't tied to those investments.

[00:09:05] [SPEAKER_01]: If you're a VC, you typically want to spread out the risk between different founders and companies.

[00:09:11] [SPEAKER_01]: But VY basically has put all of their chips in on Elon Musk.

[00:09:16] [SPEAKER_03]: Elon Musk didn't respond to a request for comment for your story.

[00:09:19] [SPEAKER_03]: But what are some of the things John Herring did to try and get close to Musk and his inner circle?

[00:09:25] [SPEAKER_01]: VY started off with a really good investment into SpaceX in 2016.

[00:09:31] [SPEAKER_01]: And they got into it because of the connection that John Herring had with Antonio Gracias, who is a very prominent Musk backer.

[00:09:40] [SPEAKER_01]: He's on the boards of Tesla and SpaceX.

[00:09:42] [SPEAKER_01]: And so he got his first leg into Musk World through a warm intro, but he didn't stop there.

[00:09:48] [SPEAKER_01]: He was constantly looking for ways to win Elon Musk's favor.

[00:09:54] [SPEAKER_01]: And so, you know, in 2016, for example, he heard the rumor that Musk was starting a new company called Neuralase.

[00:10:03] [SPEAKER_01]: And so he had his staff basically buy up all the domain names for Neuralase.com, Neuralase.ai.

[00:10:10] [SPEAKER_01]: And he kind of wanted to present it as a gift to Elon.

[00:10:13] [SPEAKER_01]: The funny thing with that anecdote is that Elon ended up naming the company Neuralink.

[00:10:16] [SPEAKER_01]: But it's those sort of small favors or looking for ways in to win Elon Musk's good graces that over time helped VY invest more and more money into Musk Inc.

[00:10:28] [SPEAKER_01]: John Herring's big breakthrough came in 2017 when SpaceX was spinning up a new product called Starlink,

[00:10:35] [SPEAKER_01]: which they were hoping would provide low-cost Internet service to people across the world.

[00:10:40] [SPEAKER_01]: And Herring basically offered to help with whatever they needed to roll out this product.

[00:10:45] [SPEAKER_01]: He even invested his own money to hire recruiters for the project.

[00:10:50] [SPEAKER_03]: So where do things stand then with their investments?

[00:10:54] [SPEAKER_01]: When Alex founded VY Capital in 2012, he did not envision this being a Musk financial subsidiary.

[00:11:02] [SPEAKER_01]: He was looking at investing across Asia, India.

[00:11:05] [SPEAKER_01]: He was very interested in backing public tech companies in addition to startups.

[00:11:08] [SPEAKER_01]: But a lot of their early investments turned out to be duds.

[00:11:11] [SPEAKER_01]: They never really raised their profile in Silicon Valley as a venture firm.

[00:11:17] [SPEAKER_01]: And they've told their investors that they're thinking of actually shutting down the whole VC business.

[00:11:22] [SPEAKER_03]: How unusual is this situation?

[00:11:24] [SPEAKER_01]: It's very unusual. I mean, Silicon Valley has this fascination with founders and the cult of personality around founders.

[00:11:31] [SPEAKER_01]: Elon is the extreme example of a founder with a cult of personality who can command an almost religious loyalty among certain investors.

[00:11:42] [SPEAKER_01]: And so you have a dynamic here where John in particular is doing anything he can to get Musk's good favor

[00:11:50] [SPEAKER_01]: so he can have the right to invest money in his companies.

[00:11:54] [SPEAKER_01]: Usually it's founders who are trying to win over VCs because they want to get them to invest in their companies.

[00:12:00] [SPEAKER_01]: So it's like an extreme inversion of how venture investing traditionally works.

[00:12:06] [SPEAKER_01]: It speaks to Musk's power and influence in the ecosystem.

[00:12:11] [SPEAKER_01]: It also speaks to the power that Musk has in terms of being able to raise a lot of money and compete.

[00:12:18] [SPEAKER_03]: That was our reporter, Berber Jin. And that's it for tech news briefing.

[00:12:22] [SPEAKER_03]: Today's show was produced by Julie Chang with supervising producer Catherine Millsop.

[00:12:26] [SPEAKER_03]: I'm Zoe Thomas for the Wall Street Journal. We'll be back this afternoon with TNB Tech Minute.

[00:12:32] [SPEAKER_03]: Thanks for listening.