SF Compute：将算力商品化，永久解决 GPU 泡沫

Hey, everyone. Welcome to the Living Space Podcast. This is Alessio, partner and CTO at Decibel, and I’m joined by my co-host, swyx, founder of Small AI.

Hey. Today, we’re so excited to finally be in the studio with Evan Conrad from SF Compute. Welcome.

Hello. How goes it? How are we doing?

I’ve been fortunate enough to be your friend before you’re famous, and we’ve also hung out at various social things. It’s really cool to see that SF Compute is coming into its own. It’s a significant presence, at least in the San Francisco community, which, of course, is in the name, so you couldn’t help but be.

Indeed. Indeed. I think we have a long way to go, but thanks.

Of course. Yeah.

Yeah.

One way I was thinking about kicking off this conversation is that we’ll likely release this right after the CoreWeave IPO.

Uh-huh.

I was doing some research on you, and you did a talk at The Curve.

Yeah.

I think I may have been viewer number 70. It was a great talk.

Thank you.

More people should go see it: Evan Conrad at The Curve. But we have roughly 3 orders of magnitude more people, and I just wanted to highlight: What is your analysis of what CoreWeave did that went so right for them?

1. CoreWeave Wins With Long Contracts

Sell locked-in, long-term contracts and don’t really do much short-term business at all. I think a lot of people had this assumption that GPUs would work a lot like CPUs, and the standard business model of any sort of CPU cloud is that you buy commodity hardware, then you layer on services that are mostly software, and that gives you high margins. Pretty much all your value comes from those services, not really the underlying compute in any capacity.

Because it’s commodity hardware and it’s not actually that expensive, most of that can be on-demand compute. While you do want locked-in contracts for folks, it’s mostly just to de-risk your situation. It helps you plan revenue because you don’t know if people are going to scale up or down. But fundamentally, people are buying hourly, and that’s how your business is structured. You’re going to make 50% margins or higher.

2. Why GPUs Break Cloud Economics

This doesn’t really work in GPUs, and the reason why it doesn’t work is because you end up with super price-sensitive customers. That isn’t necessarily because it’s just way more expensive, though that’s totally the case. In a CPU cloud, you might have, let’s say, $1 million of hardware. In GPUs, you have $1 billion of hardware. Your customers are buying at much higher volumes than you would otherwise expect, and it’s also smaller customers who are buying higher amounts of volume relative to what they’re spending in general.

But in GPUs in particular, your customer cares about the scaling law behind it. If you take Gusto, Rippling, or an HR service like this, when they’re buying from AWS or GCP, they’re buying CPUs and running web servers. Those web servers buy up to the capacity that they need. They buy enough CPUs, and then they don’t buy any more. They don’t buy any more at all.

Yeah.

And—

You have a chart that goes like this and then flatlines.

Correct. It’s a complete flatline. It’s not even an incremental, tiny amount. It’s not like you could just turn on some more nodes and suddenly they would make an incremental amount more money. Gusto isn’t going to make 5% more money. They’re going to make zero—literally zero—money from every incremental GPU or CPU after a certain point.

This is not the case for anyone who is training models, and it’s not the case for anyone who’s doing test-time inference, or inference that scales at test time. Your scaling laws may have some diminishing returns, but there are always returns. Adding GPUs always means your model does actually get better, and that translates into revenue for you.

For test-time inference, you can run the inference longer and get better performance. Or maybe you can run more customers faster and then charge for that. It actually does translate into revenue. Every incremental GPU translates to revenue.

What that means from the customer’s perspective is that you’ve got a flat budget and you’re trying to maximize the number of GPUs you have for that budget. That’s very distinctly different from where Gusto or Rippling might be thinking. They think, “We need this amount of CPUs. How do we reduce the amount of money we’re spending on this to get the same number of CPUs?”

What that translates to is customers who are spending in really high volume, but also customers who are super price-sensitive and don’t give a shit—can I swear on this? Can I swear?

Yeah, yeah.

They don’t give a shit at all about your software, because a 10% difference on $1 billion of hardware is $100 million of value for you. If you have a 10% margin increase because you have great software on your $1 billion of hardware, the customers are that price-sensitive. They will immediately switch off if they can. Why wouldn’t you? You would just take that $100 million and spend $50 million on hiring a software engineering team to replicate anything that you possibly could.

That means the best way to make money in GPUs was to do basically exactly what CoreWeave did: go out and sign only long-term contracts, pretty much ignore the bottom end of the market completely, and maximize your long-term contracts with customers who don’t have credit risk and who won’t sue you—or are unlikely to sue you—for frivolous reasons.

Then, because they don’t have credit risk and they won’t sue you for frivolous reasons, you can go back to your lender and say, “Look, this is a really low-risk situation for us. You should give me prime interest rates. You should give me the lowest cost of capital you possibly can.”

When you do that, you just make tons of money. The problem that I think a lot of people are going to talk about with CoreWeave is that it doesn’t really look like a cloud provider financially. It also doesn’t really look like a software company financially.

It’s a bank.

It’s a bank. It’s a real estate company, and it’s very hard not to be that.

The problem that people have tricked themselves into is thinking that CoreWeave is a bad business. I don’t think CoreWeave is explicitly a bad business. There are kind of 2 versions of the CoreWeave take at the moment. There’s, “Oh my God, CoreWeave is amazing. CoreWeave is this great new cloud provider, competitive with the hyperscalers.”

To some extent, this is true from a structural perspective. They are indeed a real competitor to the cloud providers in this particular category. The other take is, “Oh my gosh, CoreWeave is this horrible business,” and so on and blah, blah, blah. I think it’s just a set of perceptions or perspectives.

If you think CoreWeave’s business is supposed to look like the traditional cloud providers, you’re going to be really upset to learn that GPUs don’t look like that at all. In fact, for the hyperscalers, it doesn’t look like this either. My intuition is that the hyperscalers are probably going to lose a lot of money—and they know they’re going to lose a lot of money—on reselling NVIDIA GPUs, at least.

Hyperscalers—I want to—

Yeah.

Microsoft, AWS, and Google.

Correct, yeah.

Okay.

Microsoft, AWS, and Google—

Does Google resell? I mean, Google has TPUs, but—

Google has TPUs, but I think you can also get H100s from them and so on.

There are 2 ways they can make money. One is by selling to small customers who aren’t actually buying in any serious volume. They’re testing around and playing around, and if they get big, they’re immediately going to do 1 of 2 things. They’re going to ask you for a discount because they’re not going to pay your crazy margin that you have locked into your business. They’re going to pay your massive per-hour price, and so they want you to sign a long-term contract.

Your other way to make money is to basically do exactly what CoreWeave does: have them pay as much as possible up front and lock in the contract for a long time. Or you can have small customers.

But the problem is that for a hyperscaler, selling GPUs on the low margins relative to what your other business—your CPU business—generates is a worse business than what you’re currently doing. You could have spent the same money on those GPUs, trained a model, and then turned that into a product with high margins. Or you could have taken that same money and competed with NVIDIA, cutting into its margin instead.

Simply reselling NVIDIA GPUs doesn’t work like your CPU business, where you’re able to capture high margins from big customers and so on, and then they never leave you because your customers aren’t actually price-sensitive. They won’t switch off if your prices are a little higher.

You actually had a really nice chart, again, in that talk, this 2-by-2—

Sure.

…of where you want to be, and you also had some hot takes on who's making money and who isn't.

Sure.

So CoreWeave locked up long-term contracts. Got that.

Yes.

Maybe share your mental framework. Just verbally describe it because we're trying to help the audio listeners as well.

Sure.

People can look up the chart if they want to.

Sure.

Okay, so this is a graph of interest rates, and on the y-axis is the probability you're able to sell your GPUs, from 0 to 1.

Mm.

And on the x-axis, it's how much they'll depreciate in cost, from 0 to 1.

Ah, yeah.

And then you had isocost curves, or iso-interest-rate curves.

Yeah.

So they shape in a concave fashion.

Yeah.

The lowest interest rates enable the most aggressive form of this cost curve—

Yeah.

…and the higher interest rates go, the more you have to push out to the top right.

Yeah.

And then you had some analysis of where every player sits in this, including CoreWeave, but also Together and Modal—

Yeah.

…and all these other guys. I thought it was super insightful, so I just wanted you to—

Thank you.

…elaborate.

3. The GPU Risk Framework

Basically, it's a graph of risk, and the kinds of places where you can be and what the risk is associated with that. The optimal thing for you to do, if you can, is to lock in long-term contracts that are paid all up front or in a situation in which you trust the other party to pay you over time. So if you're selling to Microsoft or something, or OpenAI—

Which are together 77% of the revenue of CoreWeave.

Yeah. So if you're doing that, that's a great business to be in because the interest rate that you can pitch for is really low because no one thinks Microsoft is going to default. Maybe OpenAI will default, but the backing by Microsoft kind of helps you. Generally, it looks like OpenAI is winning, so you can make a case. It's just a much better case than if you're selling to the pre-seed startup that just raised $30 million or something, pre-revenue.

It's way easier to make the case that OpenAI's not going to default than the pre-seed startup. The optimal place to be is selling to the maximally low-risk customer for as long as possible, and then you never have to worry about depreciation and you make lots of money. The less good place to be is selling long-term contracts to people who might default on you.

If you're not bringing it to the present—in other words, you're not saying, “Hey, you have to pay us all up front”—then you're in this more risky territory.

So this is the top left of the chart?

If I have the chart right, maybe.

Large contracts paid over time.

Yeah, large contracts paid over time is top left, so it's more risky, but you could still probably get away with it. The other opportunity is that you could sell short-term contracts for really high prices. Lots of people tried that too, because this is actually closer to the original business model that people thought would work for cloud providers.

For CPUs, it works, but it doesn't really work for GPUs. I don't think people were trying this because they were thinking about the risk associated with it. I think a lot of people who just come from a software background have not really thought about COGS, margins, inventory risk, or things that you have to worry about in the physical world.

I think they were just copy-pasting the same business model onto GPUs. I also remember fundraising a few years ago, and I know, based on what we knew other people were saying who were in a very similar business to us versus what we were saying, that our pitch was way worse at the time.

In the beginning of SF Compute, we looked very similar to pretty much every other GPU cloud—not on purpose, but accidentally. I know that the correct pitch to give to an investor was, “We will look like a traditional CPU cloud with high margins, and we'll sell to everyone.” That is a bad business model because your customers are price-sensitive.

What happens is, if you sell at high prices—which is the price that you would need to sell at in order to de-risk your loss on the depreciation curve—let's say you're selling at $5 an hour and you're paying $1.50 an hour for the GPU under the hood. It's a little bit different than that, but those are nice numbers: $5 an hour, $1.50 an hour. Great. Excellent.

You're charging a really high price per GPU hour because over time the price will go down and you'll get competed out. What you need is to make sure that you never go under your underlying costs, or, if you do, you've made so much money in the first part of it that the later end of it doesn't matter, because from the whole structure of the deal, you've made money.

The problem is that you think you're going to be able to retain your customers with software, and actually what happens is your customers are super price-sensitive and push you down, and push you down, and push you down, and push you down until they don't care about your software at all.

The other problem that you have is you have really big players, like the hyperscalers, who are looking to win the market. They have way more money than you, and they can push down on margin much better than you can.

If they have to—and they do, though not necessarily all the time; I think they actually probably keep a higher margin—but if they needed to, they could totally wreck your margin at any point and push you down. That meant that that quadrant over there, where you're charging a high price just to make up for the risk, completely got destroyed. It did not work at all for many places because of the price sensitivity and because people could just shove you down.

Instead, that pushed everybody up to the top-right-hand corner of that, which is selling short-term contracts for low prices—

Paid over time. Yeah.

…paid over time, which is the worst financial place to be in because it has the highest interest rate. That means your costs go up at the same time your incoming cash goes down, which squeezes your margins and squeezes your margins.

The nice thing for CoreWeave is that most of their business is over on the other sides of those quadrants—the ones that survived.

The only remaining question I have with CoreWeave—and I promise I'll get to SF Compute, and I promise this is relevant to SF Compute in general because the framework is important, right?—is to understand the company. So why didn't NVIDIA or Microsoft, both of which have more money than CoreWeave—

Yeah.

…do CoreWeave? Right?

Why didn't they do CoreWeave?

Why have this middleman when either NVIDIA or Microsoft have more money than God, and they could have done an internal CoreWeave, which is effectively a self-funding vehicle, like a financial instrument? Why does there have to be a third party?

Your question is, why didn't—

NVIDIA.

…Microsoft—

Or why didn't either one of those—

…NVIDIA just do CoreWeave? Why didn't they just set up their own cloud provider?

Yeah.

4. Why NVIDIA Avoids Cloud

I think—and I don't know, so correct me if I'm wrong, and lots of people will have different opinions here, or, I mean, not opinions. They'll have actual facts that differ from my facts. Those aren't opinions. Those are actually different versions of reality—is that NVIDIA doesn't want to compete with its customers.

They make a large amount of money by selling to existing clouds. If they launched their own CoreWeave, then it would make it much harder for them to sell to the hyperscalers, so they have a complex relationship with them. That's not great for them.

Second is that, at least for a while, I think they were dealing with antitrust concerns or fears. If they own too many layers of the stack, I could imagine that could be a problem for them. I don't know if that's actually true, but that's where my mind would go, I guess. Mostly, I think it's the first one: they would be competing directly with their primary customers.

Or—

Then Microsoft could have done it, right? That's the other question.

Yeah. So Microsoft didn't do it, and my guess is that NVIDIA doesn't want Microsoft to do it. They would limit the capacity because, from NVIDIA's perspective, they don't want to necessarily launch their own cloud provider because that means competing with their customers, but they also don't want only 1 customer or only a few customers.

It's really bad for NVIDIA if you have customer concentration, and Microsoft, Google, Amazon, and Oracle too buy up your entire supply. Then you have 4 or 5 customers who pretty much get to set prices.

Monopsony.

Yeah, a monopsony. The optimal thing for you is a diverse set of customers who are all willing to pay at whatever price, because if they don't, somebody else will. It's really optimal for NVIDIA to have lots of other customers who are all competing against each other.

Great.

Yeah.

I just wanted to establish that. It's unintuitive for people who have never thought about it, and you think about it all day long.

Yeah.

The last thing I'll call out from the talk, which is kind of cool, and then I promise we'll get to SF Compute, is: Why will DigitalOcean and Together lose money on their clusters?

5. Why Hardware Software Coupling Fails

Why will DigitalOcean and Together lose money on their clusters? I'm going to start by clarifying that all of these businesses are excellent and fantastic. Together, DigitalOcean, and Lambda are wonderful businesses that build excellent products.

But my general intuition is that if you try to couple the software and the hardware together, you're going to lose money. If you go out and buy a long-term contract from someone and then layer on services, or buy the hardware yourself, spin it up, and get a bunch of debt, you're going to run into the same problem that everybody else did—the same problem we did and the same problem the hyperscalers are having—which is that you cannot add software and make high margins like a cloud provider can.

You can pitch that to investors, and it'll totally make sense. It's the correct play in CPUs, but there isn't software you could make to make this occur. If you are spending $1 billion on hardware, you need to make $1 billion of software. There isn't $1 billion of software that you can realistically make, and if you do, you're going to look like SAP.

And that's not a knock on SAP. SAP makes a fuck ton of money, right? There just aren't that many pieces of software that you could make where you can realistically sell $1 billion of software. You're probably not going to do it to price-sensitive customers who are spending their entire budget already on compute. They don't have any more money to give you. It's a very hard proposition to do.

Many parties have been trying to do this—buy their own compute—because that's what a traditional cloud does. It doesn't really work for them. You know that meme where there's the Grim Reaper, and he's knocking on the door?

Mm-hmm.

And then he keeps knocking on the next door. We have just seen door after door after door where the Grim Reaper comes by and the economic realities of the compute market come knocking.

The thing we encourage folks to do is, if you're thinking about buying a big GPU cluster and layering software on top, don't. There are so many dead bodies in the wake there. We would recommend not doing that.

Our entire business at SF Compute is structured to help you not do that. It's helped disaggregate these. GPU clouds are fantastic real estate businesses. If you treat them like real estate businesses, you will make a lot of money.

The cloud services you can make on that, all the software you want to make on that—you can do that fantastically if you don't own the underlying hardware. If you mix these businesses together, you get shot in the head. But if you split them, and that's what the market helps you do, you can layer on services but just buy from the market. You can make lots of money.

Companies like Modal that don't own the underlying compute— they don't own it—make lots of money and have a fantastic product. And companies like CoreWeave are functionally really, really good real estate businesses. Lots of money, fantastic product. But if you combine them, you die. That's the economic reality of compute.

I think it also splits into training versus inference, which are different kinds of workloads.

Sure.

And then, one comment about the price-sensitivity thing before we leave this topic. I want to credit Martin Casado for coining or naming this thing. You said that you don't have room for a 10% margin on GPUs for software.

Yep.

Martin actually played it out further. He's the first one I ever saw doing this at large enough scale. Let's say GPT-4 and o1 both had total training costs of roughly $500 million.

Yeah.

When you get the $5 billion runs—

Yes.

When you get the $50 billion runs, it actually makes sense to build your own chips. For OpenAI to get into chip design—which is so funny, to say, “I would make an ASIC for this run.”

Yeah. Maybe. I think a caveat that isn't super well thought about is that only works if you're really confident.

Yeah.

It only works if you really know which chip you're going to use. If you don't, then it's a little harder. In my head, it makes more sense for inference, where you've already established it. But for training, there's so much experimentation.

You need generality, yeah.

Yeah.

Yeah.

The generality is much more useful.

In some sense, Google is six generations into the CPUs.

Yeah.

Yeah. Okay, cool. Maybe we should go into SF Compute now.

Sure, yeah.

You kind of talked about the different providers. Why did you decide to go with this approach? And maybe talk a bit about how the market dynamics have evolved since you started the company.

6. SF Compute Becomes A Market

Originally, we were not doing this at all. We were definitely forced into this to some extent. SF Compute started because we wanted to train models for music and audio in general. We were going to do a sort of generic audio model at some point, and then we were going to do a music model at some point. It was an early company, and we didn't really scope down to a particular thing.

The first thing that you do when you start any AI lab is go out and buy a big cluster. What we had seen everybody else do was go out, raise a really big round, and then get stuck. If you raise the amount of money that you need to train a model initially—like, you know, the $50 million pre-seed, pre-revenue—your valuation is so high, or you get diluted so much, that you can't raise the next round. That's a very big ask to make.

I also feel like we just felt we couldn't do it. We probably could have, in retrospect, but I think, first, we didn't really feel like we could do it. Second, it felt like if we did, we would be stuck later on. We didn't want to raise a big round.

Instead, we thought surely by now we would be able to go out to any provider and buy what a traditional CPU cloud would offer you—buy on demand, or buy for a month or so. This worked for small, incremental things, and I think this is what we were basing it off. We just assumed we could go to Lambda or something and buy thousands of A100s at the time.

This was not at all the case. We started doing all the sales calls with people, and we said, “Okay, can we just get month-to-month? Can we get 1 month of compute or so?” Everyone told us at the time, “No, you need to have a 1-year contract or longer, or you're out of luck. Sorry.”

At the time, we were pissed off. We were like, “Why won't anybody sell us a month at a time?” Nowadays, we totally understand why. If they had sold us month-to-month and we canceled, they would have massive risk. The optimal thing to do was to completely abandon this section of the market.

We didn't like that. Our plan was that we were going to buy a 1-year contract anyway. We would use 1 month, and then sublease the other 11 months. We were locked in for a year, but we only had to pay for each individual month.

We did this, but then immediately we said, “Oh, shit, now we have a cloud provider, not a model-training company.”

Right.

Every 30 days, we owed about $500,000, and we had about $500,000 in the bank. That meant that every single month, if we did not sell out our cluster, we would just go bankrupt.

That's what we did for the first year of the company. When you're in that position, you try to think, “How in the world do you get out of that position?” What that transitioned to was: We tend to be pretty good at selling this cluster every month, because we haven't died yet. What we should do is basically be a broker for other people, and be more like a GPU real estate agent, or a GPU realtor.

We started doing that for a while. We would go to other people who had a 1-year contract they were trying to sell to somebody, and we'd go to another person who maybe wanted 6 months, while somebody else wanted 6 months, and we'd combine all these people together to make the deal happen.

And we'd organize these one-off bespoke deals that looked like... Basically, it ended up with us taking a bunch of customers, assigning them to a vendor, taking some cut, and then operating the cluster for people, typically with bare metal. We were doing this, but it was definitely an “Oh, shit. Oh, shit. Oh, shit. How do we get out of our current situation?” response, and less of a strategic plan of any sort.

While we were doing this, since the beginning of the company, we had been thinking about how to buy GPU clusters and how to sell them effectively, because we'd seen every part of it. What we ended up with was a book of everybody who was trying to buy and everyone who was trying to sell, because we were these GPU brokers. That turned into what is today SF Compute, which is a compute market that we think is functionally the most liquid GPU market of any capacity.

Honestly, I think we're the only thing that is actually a real market, with bids and asks and a trading engine that combines everything. I think we're the only place where you can do things that a market should be able to do. You can go on SF Compute today and get thousands of H100s for an hour if you want, and that's because there is a price for thousands of GPUs for an hour. That's not something you can reasonably do on any other cloud provider, because nobody should realistically sell you thousands of GPUs for an hour. They should sell them to you for a year or so on.

But one of the nice things about a market is that you can buy the year on SF Compute, and then, if you need to sell back, you can sell back as well. That opens up all these little pockets of liquidity where somebody who's just trying to buy some burst capacity for a little bit of time can do so. People don't normally buy for an hour—that's not actually a realistic thing—but that's the range.

Somebody who is like us, who needed to buy for a month, can actually buy for a month. They can place the order, and there is actually a price for that. It typically comes from somebody else who's selling back—somebody who bought a longer-term contract for some period of time, whose code doesn't work, and who now needs to sell off a little bit.

What are the utilization rates at which a market like this works? What do you see as the usual GPU utilization rate, and at what point does the market get saturated?

7. GPU Utilization And Demand

Assuming there aren't hardware or software problems, the utilization rate is near 100%, because the price dips until utilization is 100%. The price actually has to dip quite a lot for utilization not to be 100%. That's not always the case because you have logistical problems. You get a cluster and parts of the InfiniBand fabric are broken, and there's some issue with a switch somewhere, so you have to take some portion of the cluster offline.

There are just underlying physical realities of the clusters. Nominally, we have better utilization than basically anybody, but that's utilization of the cluster. That doesn't necessarily translate into... Well, I actually do think we have much better overall money made for our underlying vendors than basically anybody else.

We work with the other GPU clouds. The basic pitch to the other GPU clouds is, one, we're still your broker, so we can find you the long-term contracts at the prices that you want. But meanwhile, your cluster is idle, and for that, we can increase your utilization and get you more money because we can sell that idle cluster for you.

Then, the moment we find the longer-term, bigger customer and they come on, you can kick off those people and then go to the other ones. You get the mix of selling your cluster at whatever price you can get on the market, and then selling your cluster at the big price that you want for a long-term contract, which is your ideal business model.

The benefit of the whole thing being on the market is that you can pitch your customer that they can cancel their long-term contract, which is not something you can reasonably do if you are just the GPU cloud. If you're just the GPU cloud, you can never cancel your contract because that introduces so much risk that you would otherwise not get your cheap cost of capital or whatever.

But if you're selling it through the market or you're selling it with us, then you can say, “Hey, look, you can cancel for a fee.” That fee is the difference between the market price and the price that they paid, which means that if they cancel, you have the ability to offer that flexibility, but you don't have to take the risk of it. The money's already there and you got paid; it's just being sold to somebody else.

One of our top pieces from last year was talking about the H100 glut from all the long-term contracts that were not being fully utilized and were being put onto the market.

You have $1-per-hour contracts on here, and it goes up to $2. Actually, I think you were involved. You were obliquely quoted in that article. I think you remember.

Yes, I remember.

Because this was hidden. Well, we hid your name, but then you were like, “Yeah, it's us.”

Yeah.

Could you talk about the supply and demand of H100s? Was that just a normal cycle? Was that a supercycle because of all the VC funding that went in in 2023? What was that? GPU prices have come down.

Yeah. GPU prices have come down.

Some part of that is a normal depreciation cycle. Some part of that is just that there were a lot of startups that bought GPUs and never used them, and now they're lending them out, and therefore you exist.

There are a lot of theories as to why this happened. I dislike all of them because they're often said with really high confidence, and I think the market is much more complicated than that. Everything I'm going to say is very hedged.

There were a series of places where a bunch of the orders were placed, and people were pitching to their customers, their investors, and the broader market that they would arrive on time. That is not how the world works. Because there was such a quick build-out of things, you would end up with bottlenecks somewhere in the supply chain that had nothing necessarily to do with the chip.

It's the InfiniBand cables or the NICs or whatever, or you need a bunch of generators, or you don't have data center space. There's always some bottleneck somewhere else. A lot of the clusters didn't come online within the period of time that people expected. But then all the bottlenecks got sorted out, and they all came online at the same time.

I think you saw a shortage because the supply chain got hard, and then you saw an increase, or a glut, because the supply chain eventually figured itself out.

Specifically, people overordered in order to get the allocations that they wanted. Then they got the allocations, and then they went under. Yeah, whatever, right? There was just a lot of shenanigans.

A caveat to this is that every time you say somebody overordered, there's an assumption that the problem was that demand went down.

Uh-huh.

I don't think that's the case at all, and I want to clarify that. It definitely seems like there's more demand for GPUs than there ever was. It's just that there is also more supply.

At the moment, I think there is still functionally a glut. But the difference that I think is happening is mostly the test-time inference stuff: you just need way more chips for that than you did before.

Whenever you make a statement about the current market, people take your words and assume that you're making a statement about the future market. If you say there's a glut now, people will continue to think there's a glut. But I think what is happening at the moment—my general prediction is that, by the winter, we will be back toward a shortage.

This also very much depends on the rollout of future chips, and that comes with its own... I think I'm trying to give you a good—here's Evan's forecast—but I don't know if my forecast is very—

Okay.

You don't have to. Nobody's going to hold you to it, but I think people want to know what's true and what's not. There's a lot of vague speculation from people who are not that close to the market, actually, and you are.

I think I'm close to the market, but I'm also a vague speculator. I think there are a lot of highly confident speculators, and I am indeed a vague speculator. I think I have more information than a lot of other people, and this makes me a vaguer speculator, because I feel less certain or less confident than I think a lot of other people do.

The thing I do feel reasonably confident about saying is that test-time inference is probably going to significantly expand the amount of compute that is used for inference. A caveat to this is that pretty much all the inference demand is in a few companies.

A good example is that a lot of biotech and pharma companies were using H100s to train biological models. They would buy thousands of H100s for training and then not a lot of hardware for inference—not relative to OpenAI or Anthropic, because they don't have a consumer product. Their inference event, if they can do it right, is really just 1 event that matters. Obviously, I think they're going to run in batch, and they're not literally going to run just 1 inference event, but the one that produces the drug is the important one.

I'm dumb and I don't know anything about biology, so I could be completely wrong here. But my understanding is that's kind of the gist.

I can check that for you.

You can check that for me.

My understanding is that the one that produces the sequence that is the drug that cures cancer or whatever—that's the important deal. A lot of models look like this, where they're more enterprise use cases. Prior to something that looks like test-time inference, you got lots and lots of demand for training, and then it pretty much entirely fell off for inference.

I think we looked at OpenRadar, for example. The entirety of OpenRouter that wasn't Anthropic, Google Gemini, OpenAI, or something was about 10 H100 nodes. That's not that much. It's not that many GPUs to service that entire demand, but that's a really sizable portion of the open-source market. The actual amount of compute needed for it wasn't that much.

If you imagine what OpenAI needs for GPT-4, it's tremendously big, but that's because it's a consumer product that has almost all the inference demand.

Yeah, that's a message we've had: roughly, open-source AI compared to closed AI is 5%.

Yeah, it's super small.

Super small.

It's super small. Test-time inference changes that quite significantly, so I expect that to increase our overall demand. But my question about whether or not that actually affects your compute price depends entirely on how quickly we roll out the next chips.

The way that you burst is different for test time.

Yeah.

Any thoughts on the third part of the market, which is the more peer-to-peer, distributed market? Some of them are crypto-enabled, like Hyperbolic, Prime Intellect, and all of that. Where do those fit? Do you see a lot of people wanting to participate in a peer-to-peer market, or, because of the capital requirements, does it not really matter at the end of the day?

8. Distributed GPU Markets Fall Short

I'm wildly skeptical of these, to be frank.

The dream is sitting at home, right? I have this 4090. Nobody has 4090s. I can rent it out.

Yeah, I just don't think this is ever going to be more efficient than a fully interconnected cluster with InfiniBand or whatever the next spec might be. I could be completely wrong, but the speed of light is really hard to beat. Regardless of whatever you're using, you just can't get around that physical limitation.

You could imagine a decentralized market that still has a lot of places where there's co-location, but then you'd get something that looks like SF Compute. That's what we do. Our general take on SF Compute is that you're not buying from random people. You're buying from the other GPU clouds, functionally. You're buying from data centers that are the same genre of people that you would work with already, and you can specify, “I want all these nodes to be co-located.” I don't think you're really going to get around that.

I think I buy crypto for the purposes of transferring money. The financial system is quite painful, and so on. I can understand its uses to incentivize an initial market or try to get around the cold-start problem. We've been able to get around the cold-start problem just fine, so we didn't actually need that at all.

What I do think is totally possible is that you could launch a token and subsidize the compute prices for a bit. Maybe that will help you.

I think that's what Nus is doing.

Yeah, I think there are lots of people trying to do things like this, but at some point that runs out.

So I would generally agree. I think the only thread in that model is a very fine-grained mixture of experts that can be—

Yeah.

—where the algorithms can shift to adapt to hardware realities. The hardware reality is, okay, it's annoying to do large co-located clusters, so we'll just redesign attention or whatever in our architecture to distribute it more.

Yeah.

There was a little bit of buzz about block attention last year that Strong Compute made a big push on. But I think in a world where we have 200 mixture-of-experts in an MOE model, it starts to be a little bit better.

I don't disagree with this. I can imagine a world in which you've redesigned it to be more parallelizable across space. But without that, your hardware limitation is your speed-of-light limitation, and that's a very hard one to get around.

Any customers or stories that you want to shout out about—maybe things that wouldn't have been economically viable otherwise? I know there's some sensitivity on that, but—

9. Compute For Underfunded Researchers

My favorites are grad students—folks who are trying to do things that would normally otherwise require the scale of a big lab. Grad students are the worst possible customers for traditional GPU clouds because they will immediately churn if you sell them something: they're going to graduate and not go anywhere. Or they're not going to—

Mm-hmm.

That project isn't continuing to spend lots of money. Sometimes it does, but not if you're working with the university or a lab of some sort.

The ability for us to offer big burst capacity is lovely and wonderful. It's one of my favorite things to do because all those folks look like we did. I have a special place in my heart for young hackers, young grad students, and researchers who are trying to do the same kind of thing that we are doing.

Mm-hmm.

I also have a special place in my heart for startups—the people who are actively trying to compete on the same scale but can't afford it time-wise, but can afford it—

Money, yeah.

Spike-wise.

Yeah. I liked your example of, “I have a grant of $100,000, and it's expiring. I've got to—”

Cut. Cut.

Spend it on that.

Yeah.

That's really beautiful, and I hope interesting. Has there been interesting work coming out of that? Anything you want to mention?

From a startup perspective, Standard Intelligence and Phind—P-H-I-N-D—and then, from a grad students' perspective, we worked a lot with Schmidt Futures grantees of various sorts. My fear is that if I talk about their research, I'll be completely wrong to an almost insulting degree because I'm very dumb. But yeah.

I think one thing that's maybe also relevant, from a startups-and-GPUs perspective, is that there was a brief moment when it kind of made sense for VCs to provide GPU clusters. Obviously, you worked at AI Grant—

Yeah.

—which set up Andromeda, which is supposedly a $100 million cluster.

Yeah, I can explain why that's the case, or why anybody would think that would be smart, because I remember that before any of that happened, we were asking for it to happen.

Yeah.

The general reason is credit risk.

Again, it's a bank. I have higher—

Yeah.

I have lower risk than you. I do the credit transformation. I take your risk onto my balance sheet.

Correct. Exactly. If you wanted to set up a GPU cluster, you had to be the one who actually bought the hardware, racked and stacked it, and co-located it somewhere with someone. Functionally, it was on your balance sheet, which meant you had to get a loan, and you cannot get a loan for $50 million as a startup—not really.

You can get venture debt and stuff, but it's very, very difficult to get a loan of any serious size for that. It's not that difficult to get a loan for $50 million if you already have a fund or already have, like, $1 billion in assets somewhere. Or you can personally guarantee it or something. If you have a lot of money, it's way easier for you to get a loan than if you don't have a lot of money.

And so the hack of a VC or some capital partner offering equity for compute is always some arbitrage on the credit risk.

That's amazing.

Yeah.

That's a hack. You should do that.

I don't think people should do it right now. I think it made sense at the time, and it was helpful and useful for the people who did it at the time, but I think it was a one-time arbitrage because now there are lots of other sources that can do it. And also, I think it made sense when no one else was doing it, and you were the only person who was doing it.

Yeah.

But now it's an arbitrage that gets competed down.

Sure.

So I don't know if it's super effective. I wouldn't totally recommend it. It's great that Andromeda did it. But the marginal increase of somebody else doing it is not super helpful.

I don't think that many people have followed in their footsteps. I think maybe Andreessen did it.

Yeah.

That's it.

I think just because pretty much all the value flows to Andromeda. I think the—

What? That cannot be true.

I think you had to do it—

How many companies are in AI Grant?

Like 50.

My understanding of Andromeda is it works with all the NFDG companies, or several of the NFDG companies. But I might be wrong about that again. Nat, don't kill me. I could be completely wrong. But—

It's perfect. His timing is impeccable.

Timing, yeah. Nat and Daniel are— There are lots of people who are—

Seer?

Yeah, Seer, like S-E-E-R.

Oh, Seer.

Like seers of the—

Oh, Sears, the mall.

—of the Valley. For years and years before the ChatGPT moment or anything, they had fully understood what was going to happen. Way, way before. AI Grant is like 5 years old, 6 years old, or something like that—7 years old when it first launched or something.

It depends where you start: the nonprofit version.

Yeah.

Yeah.

The nonprofit version was—

Yeah.

—happening for a while, I think. It's been going on for quite a bit of time. And then Nat and Daniel are the early investors in a lot of the early AI labs of various sorts. They've been doing this for a bit.

I was looking at your pricing yesterday. We were kind of talking about it before, and there's this weird thing where 1 week is more expensive than both 1 day and 1 month. What are some of the market pricing dynamics? To somebody that is not in the business, this looks really weird. But I'm curious if you have an explanation for it that looks normal to you.

Yeah. The simple answer is that preemptible pricing is cheaper than non-preemptible pricing, and the same economic principle is the reason why that's the case right now. That's not entirely true on SF Compute. SF Compute doesn't really have the concept of preemptible; instead, what it has is very short reservations.

You go to a traditional cloud provider and say, "Hey, I want a reserved contract for a year." We will let you do a reserved contract for 1 hour, which is the part of SF Compute. But what you can do is just buy every single hour continuously. You're reserving just for that hour, and then the next hour you reserve just for that next hour. This is built in; this is an automation that you can use.

What you're seeing when you see the cheap price is somebody who's buying the next hour, but maybe not necessarily buying the hour after that. So if the price goes up too much, they might not get that next hour. The underlying part of this, where that's coming from in the market, is you can imagine day-old milk, or milk that's about to be old. It might drop its price until it's expired, because nobody wants to buy milk that's in the past, or maybe you can't legally sell it.

Compute is the same way. No, you can't sell a block of compute that is in the past. And so what you should do in the market, and what people do, is take a block of compute and then drop it and drop it and drop it and drop it to a floor price right before it's about to expire. They keep dropping it until it clears. And so anything that is idle drops until some point.

If you go on the website and set that chart to 1 week from now, what you'll see is much more normal-looking curves. But if you say, "Oh, I want to start right now," that immediate instant—here's the compute that I want right now—is functionally the preemptible price. It's where most people are getting the best compute prices.

The caveat of that is you can do really fun stuff on SF Compute if you want, because it's not actually preemptible. It's reserved, but only reserved for an hour. The optimal way to use SF Compute is to buy on the market price but set a limit price that is much higher.

You can set a limit price for $4 and say, "Oh, if the market ever happens to spike up to $4, then don't buy. I don't want to buy at that price for that hour. But otherwise, just buy at the cheapest price." If you're comfortable with the volatility of it, you're actually going to get really good prices, close to $1 an hour or so, sometimes down to $0.80 or whatever.

You said $4, though.

Yeah. So that's the thing.

You want to lower the limit?

So $4 is your max price. $4 is where you basically want to pull the plug and say, "Don't do it," because the actual average price—or the preemptible price—doesn't actually look like that. What you're doing when you're saying $4 is, "Always, always, always give me this compute. Continue to buy every hour. Don't preempt me. Don't kick me off, and I want this compute."

Okay, okay.

Just buy at the preemptible price, but never kick me off. The only times you get kicked off are if there is a big price spike. Let's say 1 day out of the year there's a $4-an-hour price because of some weird fluke or something. If during other periods of time you're actually getting a much lower price, then you—

It makes sense.

—it makes sense. Your average cost that you're actually paying is way better, and your trade-off here is you don't literally know what price you're going to get, so it's volatile. But your actual average historically has been—everyone who's done this has gotten wildly better prices. And this is one of the clever things you can do with the market. If you're willing to make those trade-offs, you can get a lot of really good prices.

You can also do a bunch of other things, like only buy at night, for example. The price goes down at night, and so you can say, "Oh, I want to only buy if the price is lower than $0.90." If you have some long-running job, you can make it only run at $0.90, then you recover back and so on. But—

Yeah. So what you can kind of create as a spot instance is what the CPU world has.

Yes.

But you've created a system where you can kind of manufacture the exact profile that you want.

Exactly.

That is not just whatever the hyperscale is offering you, which is usually just one thing.

Correct. SF Compute is like the power tool of GPU financing.

The underlying primitives of hourly compute are there.

Correct.

Yeah, it's pretty interesting. I've often asked OpenAI: all these guys, Claude as well, they do batch APIs.

Yep.

So it's half off of whatever your thing is.

Yeah.

And the only contract is, "We'll return it in 24 hours."

Sure.

Right? And I was like, 24 hours is good, but sometimes I want 1 hour. I want 4 hours. I want something. And so based off of SF Compute's system, you can actually kind of create that kind of guarantee—

Totally.

—that would be, you know, not 24, but—

Mm-hmm.

—within 8 hours, within 4 hours, like half a workday—

Yes.

—I can return your result to you. And if your latency requirements are that low, actually, it's fine.

Yes.

And—

Correct.

Yeah.

You can carve that out. You can financially engineer that on SF Compute.

Yeah.

Yeah.

I mean, I think that unlocks a lot of agent use cases that I want—

Mm-hmm.

—which is, yeah, it works in the background, but I don't want you to take a day.

Yeah.

Take—

Take a couple of hours or something.

Yeah.

This touches a lot of my background because I used to be a derivatives trader.

Yeah.

This is a forward market.

Yeah.

A future is a forward market, whatever you call it.

Not a future. Very explicitly not a future.

Not yet a futures market. Yes.

Yeah.

We can talk about that one.

Yeah.

But I don't know if you have any other points to talk about. You recognize that you are a marketplace, and you've hired—I met Alex Epstein at your launch event.

Mm-hmm.

You're building out the financialization of GPUs.

Mm-hmm.

So part of that's legal.

Mm-hmm.

Part of that is listing on an exchange.

Yep.

Maybe you're the exchange. I don't know how that works. But just talk to me about that. From the legal and standardization perspective, where is this all headed? Is this fully listed on the Chicago Mercantile Exchange or whatever?

10. Building A GPU Futures Market

What we're trying to do is create an underlying spot market that gives you an index price that you can use. Then, with that index price, you can create a cash-settled future. With a cash-settled future, you can go back to the data centers and say, “Lock in your price now and de-risk your entire position,” which lets you get cheaper cost of capital and so on.

We think that will improve the entire industry because the marginal cost of compute is the risk, as shown by that graph in basically every part of this conversation. It's risk that causes the price to be all sorts of funky, and we think a future is the correct solution to this. So that's the eventual goal.

Right now, you have to make the underlying spot market in order to make this occur. To make the spot market work, you actually have to solve a lot of technology problems. You really cannot make a spot market work if you don't run the clusters, if you don't have control over them, and if you don't know how to audit them, because these are supercomputers, not soybeans. They have to work in a way that it's just a lot simpler to deliver a soybean than it is to deliver the—

I know. Talk to the soybean guys.

Sure.

You know.

Yeah, but you have to have a delivery mechanism. Somebody somewhere has to actually get the compute at some point, and it actually has to work. It is really complicated.

That is the other part of our business: we go and build a bare-metal infrastructure stack, and then we also do auditing of all the clusters. You sort of de-risk the technical perspective, and that allows you to eventually de-risk the financial perspective. That is the pitch of SF Compute.

Yeah. I'll double-click on the auditing of the clusters.

Yep.

This is something I've had conversations with Yitay. He started Reka, and he had a blog post that kind of shone a light on how unreliable some clusters are versus others.

Correct. Yep.

Sometimes you have to season them and age them a little bit to find the bad cards.

Correct. You have to burn them in. Yep.

So what do you do to audit them?

There's a burn-in process, a suite of tests, and then active checking and passive checking. The burn-in process is where you typically run Linpack. Linpack is a bunch of linear algebra equations, and you're stress-testing the GPUs.

This is a proprietary thing that you wrote?

No, no, no. Linpack—

Oh, is it? Okay.

Linpack is the most common form of burn-in. If you just type in “burn-in,” typically when people say burn-in, they literally just mean Linpack. It's an NVIDIA reference version of this.

And again, NVIDIA could run this before they ship, but now the customers have to do it. It's annoying.

You're not just checking for the GPU itself. You're checking the whole component, all the hardware, and its location. It's an integration test.

Yeah.

Yeah. What you're doing when you're running Linpack, or burn-in in general, is stress-testing the GPUs for some period of time—48 hours, for example, maybe 7 days or so—and you're just trying to kill all the dead GPUs or any components in the system that are broken.

We've had experiences where we ran Linpack on a cluster and it browns out. It sort of comes offline when you run Linpack. This is a pretty good sign that maybe there is a problem with this cluster. Linpack is the most common standard test.

Beyond that, we have a series of performance tests that replicate a much more realistic environment as well. Assuming Linpack works at all, you run the next set of tests. While the GPUs are in operation, you're also doing active tests and passive tests.

Passive tests are things that are running in the background while somebody else is running, while some other workload is running. Active tests are during idle periods, when you're running some sort of check that would otherwise interrupt something. The active tests will take something offline, basically, or a passive check might mark it to get taken offline later, and so on.

The thing that we are working on, which we have working partially but not entirely, is automated refunds, which is basically for the case where the hardware breaks so much—

Yep.

There's only so much that we can do, and it is the effect of pretty much the entire industry. A pretty common thing that I think happens to everybody in the space is that a customer comes online, they experience your cluster, and your cluster has the same problem that any cluster has—or it's a different problem every time, but they experience one of the problems of HPC. Then their experience is bad, and you have to negotiate a refund or some other thing like this.

It's always case by case, and a lot of people just eat the cost.

Correct. One of the nice things we can do as a market, and have been doing as we get bigger, is immediately give you something else, and then also automatically refund you. You're still going to experience it. The hardware problems aren't going away until the underlying vendors fix things, but honestly, I don't think that's likely because you're always pushing the limits of HPC. This is the case when trying to build a supercomputer.

One of the nice things we can do is switch you out for somebody else somewhere and then automatically refund you or prorate, or whatever the correct move is.

Yeah, yeah. One of the things that you said in this conversation with me was that a provider is good when they guarantee automatic refunds.

Yep.

Which doesn't happen, but—

Yeah, that's in our contract with all the underlying cloud providers.

You built it in already.

Yeah. So we have a quite strict SLA that we pass on to you.

Yeah.

The reason I'm hedging on this is because we have some amount of active checks and some amount of passive checks. There are always new genres of bullshit.

Mm-hmm.

The new genres of bullshit might cause a customer to have a bad experience, the active or passive checks didn't catch it, and so then it's a manual process after that. We have a literal thing on our website where you can just say, “Hey, some hardware problem. Please tell us,” and then we will go and resolve it for you.

Well, cards don't change from generation to generation. What is a new genre of bullshit?

If every component piece in the cluster has maybe a 1-in-100 chance of failing, or maybe a 1-in-1,000 chance of failing, or maybe a 1-in-10,000 chance of failing—

You discover them.

You discover them. There are ones that maybe nobody saw, maybe you didn't see, or maybe it only matters for this 1 cluster with this motherboard in this particular data center, or something. There are new interactions that otherwise don't happen. Most problems are really common, and you can adapt to them. A GPU falling off a bus is one of the most common things that can happen.

So it's not SF Compute's job to go fix those things.

No, it totally is to some extent.

You just—

Totally is to some extent. We operate the cluster. Unlike a reseller, which is what we were doing before, in almost all cases we have BMC access. So if on your laptop there's the button in the top-right-hand corner that you can hold down to re-image the machine—

Mm-hmm.

There's a similar thing in a server. It's this other box that kind of plugs in, and it basically lets you reset the machine from outside. It's a remote-hands sort of thing. We ask for this from a lot of our vendors, which means we have quite a lot of ability to solve problems for customers in a way that you might not get from a reseller.

Oftentimes, we're the person who's debugging your cluster. For most customers that we work with, we have a Slack channel. Our entire engineering team gets put in the Slack channel. If there was a problem at 2 AM, we're the ones debugging your problem at 2 AM. Not always the case, because we don't physically run the hardware cluster or the data center itself, but most problems are solvable through this.

So that's the auditing side.

Yeah.

The other side is, I think of it as standardization, or whatever you call it. Beyond auditing, the other part of the work is kind of standardizing the commodity contracts.

Yeah.

Yeah.

There are 2 ways that we do that. One is that you set a “this-or-better” list. You set a spec list, and you say, “Oh, you're going to get...” A common variable is the amount of storage on the cluster. You'll say, “Oh, you're going to get X or better,” and there's some guaranteed minimum, and sometimes you might get more.

We're working on a persistent storage layer that might sort of abstract a lot of this away, but mostly it's that, and then there's a whitelist of motherboards and various generations of things. The other part is that we run the clusters from bare metal up, and so we make a UEFI shim.

If you're not familiar with what UEFI is, UEFI is the modern version of BIOS.

Firmware.

Modern meaning it's been around forever, but BIOS is really old. It's this old IBM thing. You can write code that exists at the UEFI layer, and again, when you hear UEFI, you should think BIOS. It does the same sort of thing as a PXE boot, but in environments in which PXE boot doesn't necessarily always work for us.

It basically sits at your BIOS, downloads an image, boots into an image that's custom for the user, and then on top of that image, we can throw Kubernetes on it, we can throw VMs on it, or whatever you want. At some point, we'll probably do more stuff with that, but that's functionally what we can do.

The nice thing, though, is that because you control it from that layer, you can easily image an entire cluster, make it all the same, and run your performance tests. It's all automated, so much nicer than what we used to do.

Yeah. Yeah, I mean, that is very important work. I think, for me, as a trader, I need standard contracts.

Correct. Yeah.

And so there basically needs to be the spec of a GPU.

Right.

Yes.

What we functionally do is have a market under the hood that's focused on the buyer and the seller, and it's optimized for them. Beyond that, for a trader, you can standardize around a certain segment of it, and you can trade on that contract. That's the goal that we're trying to get to, but you start by making something that works really well for buyers and really well for sellers.

For those who are not familiar with derivatives markets, I can go ahead and say this: the point of being cash-settled, which is something that you mentioned, is that you don't have to take physical delivery of the GPUs.

Right.

And that actually does mean that, almost for certain, there will be more volume on SF Compute's marketplace than actually changes hands in GPU terms.

To be super clear, we are not a derivatives market.

This doesn't happen yet. Yeah.

We are not a derivatives market. We may, in the future, work to create a cash-settled future. We are not currently a derivatives market; we are an online spot market.

Yeah.

Um—

I just think people, normies, get really upset when they learn things like, “Oh, derivatives on mortgages are 12 times larger than the mortgages themselves.”

Yes. A common thing that people have talked to us about, or a fear or concern people have, I think, is, “Oh, you're financializing compute, and this will cause various problems.”

Subprime crisis.

Yeah. I think, first, part of this is just because crypto caused a lot of people to think about finance in a very degen way, if that's the right word. Before that, the 2008–2009 crisis caused people to think about it also in sort of a degen-y way, and this is very much not our mindset.

The reason to create a derivative at all, or the reason to create a future at all, is risk reduction. That's what futures do. The reason why a farmer wants a future is because they have no idea what the weather is going to do, and they don't want to be on the hook. They have small margins, and if things go wrong, they really, really want to have a locked-in price so that they can continue to exist for the next year.

Data centers are the same way. The way that they solve it today is you go out and sign long-term contracts with your customers. What that does for you is it means your business is de-risked. You don't have to worry about the revenue for the next year.

But that means that the customer now has to worry about what they're going to do with all this compute if they don't optimally use it, and so on. That just pushes everything onto the startups, who then in turn push it onto VCs. What the VCs are forced to do in order to invest in AI is go and write big, giant valuations for pre-revenue companies at ridiculous multiples.

So what you've done by not having a future is you've inflated the venture capital market, and that's a bubble that's totally going to pop at some point. A lot of the companies are not going to work, and the valuations are not going to work. What's going to happen is a lot of these funds aren't going to return to their LPs, and that affects the broader market.

The way that you solve that, the way that you add stability to the entire economic system in this chain, is you add a future. That's how we did it in lots of other markets. It doesn't have to be this like, “Oh my gosh, we're going to speculate on GPU prices,” and whatever. No. The whole point of SF Compute is to reduce the risk, reduce the technical risk, and reduce the financial risk.

Let's just chill out a little bit. There's so much other random stuff. It's supercomputers, there's AGI, whatever. No, let's just chill the fuck out.

I mean, also, Dan is going, raising at a $30 billion valuation for Ilia. You know, like—

Yeah. If everybody else in all of AI is pushing the hype and the extreme, everything we've been trying to do is go the other way.

The whole website is just a fucking single page. The entire brand is just, “What if we were calm in nature?” Everything that we do as the product is just calm. What if we were the opposite force of the big, hype-y, extreme thing? What if we just chilled things out?

Part of that was because, in the beginning, we were at the whim of the hype-y nature. Our entire origin is that every 30 days, if we don't sell out, we're going to go crazy and just completely bankrupt the company. Everybody in the company is just like, “What if we just chilled out? What if we stopped for a bit?”

Mm.

What if we stopped for a bit?

This is the first time I've ever heard derivatives are the way to chill out.

Yes. No, futures are the way to chill out.

Futures.

Futures are the way to chill out the entire industry. We wouldn't be doing this if that weren't the case.

I like that.

And you have a very nice brand with a clear sky.

Sure. We have to ask about the website.

Yeah.

What was the inspiration behind it? Why did you not go with the black-neon, more-cool thing and go with something more nature-oriented?

I don't think I really am a black-neon sort of person. I say this wearing black pants, and I thought I was wearing a black shirt, but apparently I'm not.

The actual thing was that a lot of companies do this thing where their website—you go there, and it's like a magical experience, and everything is extreme and amazing and incredible. Then you go to the product, and it's some SaaS app or something.

It's not actually that exciting, and that expectation of being really, really good, followed by the falloff—the drop from not being really, really good—was something that, from a product perspective, I never wanted to happen, especially because in the beginning, our product was really bad.

And so I don't want to set the expectation that it's going to be an amazing experience. I want to set the expectation that it's going to be a good price for short-term bursts. What we did instead is set the bar really low. You set your expectations really low, and then you get a supercomputer for millions of dollars cheaper than you would've otherwise gotten a supercomputer. And so you have the opposite expectation: really low expectations that are met or exceeded.

I think that's the correct way to do things. But also, we were just so sick of hype and excitement, and I really want to not do that.

It's weird: by being anti-hype, you have created hype. I would say the vibe's very immaculate—

Yeah, I hate that.

You know?

Yeah.

You just go to the Bay, The Cow Trade, and put up a banner that just says “SF Compute.”

True. That banner was created about 5 minutes before we had to actually put something up, before the deadline was there.

Yeah. You opened up Microsoft Word and did some serif.

Yep.

What is the font?

Exactly.

It's—I don't know.

Yeah, that was—indeed.

The only caveat to this, the only caveat where we ever violate this rule, is when we're pitching San Francisco. I think San Francisco is amazing, so sometimes you will see these advertisements.

You mean the city?

Yeah, the city. There's a part of SF Compute's brand that's these beautiful images of San Francisco or various San Francisco things, and I am the complete opposite about this. I am such a San Francisco promoter that any time we talk about the city, I want to show the city through the eyes that we have, which is mostly just a gorgeous, beautiful area with nature.

A lot of people think about San Francisco and they think about—

The Tenderloin.

Yeah, or the tech industry, or grind culture or something. But no, I think about the fog, the gorgeous view over the bridge, and the fact that there is this massive amount of optimism in the city. The backdrop of that optimism is the most beautiful countryside in all the world.

Any time we talk about San Francisco, you'll see that we have a billboard somewhere that's just like, “Local-friendly supercomputer,” whatever, and then the backdrop is beautiful and amazing. That's because, to some extent, we're pitching the city and the people here. I think the people in this city are actually really amazing, and so you get to earn the brand.

Mm-hmm.

Because the expectations are met. Whereas on our own product, I typically want it to be better, and so I set the brand a lot lower. Then the expectations are higher. You still meet the expectations, but you set them a little lower.

I know—are you the designer? I know you have an artistic side.

I was in the beginning. I'm a figurative artist, so I draw people. But we've worked with a design firm. Aerofoil was really excellent with us, and nowadays, John Pham—

Oh, yeah.

Head of design—

From Vercel.

Yeah. John is unbelievably amazing. I think the amount of care, craft, and attention to detail that he puts into just everything is so cool.

Yeah.

The other person is Ethan Anderson, our COO, who has this RISD design background. He's sort of an industrial designer—I'm probably going to say that wrong. He's probably not an actual industrial designer, but he has a design background. So I think between me, John, and Ethan, we're—

The source of the vibes. I had to ask.

The source of the vibes.

Okay, so we're going to zoom out a little bit. One of the last things I wanted to ask you was—I remember, I think the first time I met you was when you were kind of solo and working on your email startup.

Oh, yeah, yeah.

I have a favorite pet topic of mine. We were here with Dharmesh yesterday talking about someone building an agent that reads my emails.

Yeah.

And you did, and I think I actually paid for the first one. You were so excited in the early GPT-3 days. I was like—you were like, “I'm building the most expensive startup ever.”

It's so expensive.

Anyway, the point being: you're a very smart guy. You built email, you didn't like it, and you pivoted away. I've seen others—every year there's someone who says, “I will crack email,” and then they give up. What is so hard about email?

11. From Email To Supercomputers

I didn't pivot away because the product or the idea was bad. I pivoted away because I was super burnt out. I did a startup for about 4 years, and the first thing didn't work out.

Is this Room Service?

Yeah, this is Room Service. My startup before this originally started as Quirq, which was a mental health app, but Quirq had the same problems that basically every mental health app has: your retention goes to 0 if you work it in any capacity.

So I switched and said, “Okay, well, I will do something that's closer to my actual background.” It was a distributed systems company called Room Service. Room Service went for about 9 months and then had the same problem that I think every other competitor in that space has, which is that mostly people build it in-house.

I went back to our investors at the time, Nat and Daniel, and specifically Daniel told me that I should go start the Ocean, and that I would find something else to do and just throw shit at the wall. I think it was Gustaf at YC. Maybe it was probably actually Dalton Caldwell. Dalton Caldwell, like, just said, “Don't die.” You can just keep doing things and don't die.

I think I just got it in my head that you should keep trying things and not die. I really did not want to die and didn't really know what to do, so I threw out 40 products with the assumption that if you just keep trying things, you won't die.

This is actually not the most ideal thing to do. You should totally just pick a thing and go with it. But my brain wasn't set on, “Oh, I should do this particular thing.” It was set on not dying. So I just kept going for a very long time, for 4 years, and by the end of it, I think I was super burnt out.

I was going to do the email thing with 1 co-founder, and then they quit. Then I was going to do an email thing with another co-founder, and they fell in love and decided to get married, and you know, all that.

Okay, so it wasn't that email is intractable.

Yeah.

Is this a graveyard of ideas? Everyone wants to do email, and then nobody does because of something?

I think it's just hard to make an email client. I think it's hard to make an email client in a competitive space in which there are lots of things. I do think the better version of that is something that looks closer to what Intercom is doing, and Intercom obviously existed beforehand.

You can think about any product: should you be doing it, or should somebody else in the industry who already has the existing customer set do it? I think Intercom has pretty successfully done this. They already had the position to do it.

What do you actually need the AI to write your emails for? Most people don't need this, but support use cases are pretty much there, and the people best able to execute on this are totally Intercom. Props to Owen. I think that was completely the correct move.

Yeah.

So should be our closing thoughts.

Closing thought, call to actions.

Yes.

Like, are you—

You're hiring.

Yeah.

Oh yeah, we are. We are hiring for two roles as of this recording. I don't know, maybe this will change and we'll be hiring for different roles, so go to the website or whatever. But the first role is for traditional systems engineering. This is for low-level systems or low-level Linux-y people.

Rust.

Yeah, almost all of our codebase is in Rust, but we're not necessarily just looking for Rust engineers. We're specifically looking for Linux-y people. The pitch is that you get to work on supercomputers, and you get to work at one of the few places in supercomputing that, I think, has a pretty good business model and is a working thing.

People generally seem to think that our vibe at SF Compute is very nice. We have an unbelievably excellent team nowadays. Our CTO is Eric Park. He's the co-founder of Voltage Park, which is one of the other GPU clouds.

He's quite possibly the sweetest man I've ever met. He's extremely chill and also extremely earnest and kind, and the rest of the team feels that energy very strongly.

The other role we're hiring for is financial systems engineering, which I really should learn what to call. It's not systems engineering, but we should really find a better name for this role. It's basically a fintech engineer. We have the same problems as traditional fintech does: we have a ledger, reporting requirements, and all that stuff.

This role is responsible for the “not lose all the money” goal. We've got a whole bunch of money flowing through us. There is a bunch of stuff you need to do in order not to lose all that money. The actual outcome of that work, besides not losing all the money—which is very important—is that you end up with better prices for the vendors and better prices for the buyers.

This means that your grad student who is making the cancer cure or whatever, and needs to be able to buy 100K of compute to scale up really big, actually can do so. This is part of the reason to work at SF Compute: the things you do actually matter in a way that you don't necessarily get at all companies. Functionally, we run supercomputers, not soybeans or, I don't know.

It's a very cool place to work because the outcomes of what you do have real-deal impact—

Yeah.

—in a way that you don't always get when you're doing SaaS.

Excellent pitch. I bet you've done that a lot, but it's nice to hear it for the first time. I was going to say, have you looked into TigerBeetle, the double-entry accounting database?

We have, though—

That seems to be the thing if you want to make systems that don't lose money.

Yes. For systems that don't lose money, there are lots of other things you have to do. You have to make things in a format that your accountants can read, and then get audited and so on. It's not purely the tech.

Cool.

Yeah.

Awesome. Thank you so much.

Yeah, of course.

It's been great.

Thank you so much for having me.