Short answer: Hooman Radfar says many AI companies sell a dollar for 25 to 50 cents on venture money; if OpenAI raises prices, tools like Cursor face margin pressure. Jordan Metzner says switching costs are zero.
Watch this answer from Episode 14 (starts at 30:20) · Episode 14 notes and transcript
From Episode 14: Inside the $1.4 Trillion Solopreneur Market + the Tools We Built (ft. Hooman, Collective CEO), starting at 30:20.
Hooman Radfar [30:20]: My point is is the way that the valuations are set up and the game is being set up, it's assuming perfect model. So, like, I'll give you an example. And I don't mean any like, to pick on, like, Cursor, for example. Like, there are there's any of those com there's some of these companies that have their either a negative gross margin or very low gross margin. Right? And I had a conversation with an investor this week, and they said the AI companies just fundamentally can grow faster. There's a new way of growth. Right? And I disagree. I think some of the products are so unique. Like, ChatGPT. Phenomenal. Like, brand new step function change. There's a couple of those. Okay? But, like, some of these other products, at the end of the day, and I mean, you sell this with the on demand ecosystem. If I offer you Sam a dollar for 50¢, you're gonna be like, alright. Sure. I'll take that deal. Right?
Hooman Radfar [31:14]: That's what they're doing. They're literally they're the reason I'm saying a dollar for 50¢ is they're just saying, well, at some point, this compute is gonna be cheaper, and I'm gonna keep getting venture dollars until that happens. So there's a certain slope of costs that they're assuming. Okay? And it's very aggressive. Secondly, they're all built on the same couple foundation model of companies who also will have the same pressure. So it's not that actually they're giving you, just the dollar for 50¢. They're giving you an even cheaper because they're giving for 25¢ because they're not paying OpenAI enough. They're not paying Anthropic enough. Because Anthropic and those guys are getting money from The Middle East that, like, in bucket loads and other companies. So they're like, yeah. It's okay if we're at whatever gross margin, 50%. Right? Now what happens when OpenAI goes public and the and, like, they have margin pressure? And then now they're win they're won.
Hooman Radfar [32:07]: They've won. What would they usually do? They will start charging more. They will extend their dominance and say, okay. I wanna have 80% margin. I wanna be a cash machine.
Jordan Metzner [32:14]: But the switching costs here are zero. All of these have zero switching costs. That's why Cursor is such a dangerous position. That's how they grew so fast, and that's how they can fall so fast. And same with OpenAI. Right? Same with all of them.
Hooman Radfar [32:26]: You're kinda jumping on my argument here. So my point is actually now let's just do this is why I'm saying if a crunch happens, OpenAI goes back to Cursor and says, Cursor, I'm charging more. Okay. Is Cursor going to make the product more expensive, or they gonna eat the margins? Well, I imagine the pressure that goes to OpenAI that year is gonna go to Cursor's board, and their board's gonna say we need to get to 80% gross margins. Okay. Now if I told you, Jordan and Sam, who you if you use Cursor, a great tool. I have no problem with it, obviously, that it's two times more expensive. Would you do you think that it's gonna grow at the same rate as if it was two times as expensive? My argument is no.
Jordan Metzner [33:00]: Oh, of course not.
Hooman Radfar [33:01]: Oh, okay. So this is my argument to VCs. I'm like, you're not experiencing a phenomenon that's like this brand new thing with AI for most products. Some of them are step function, different pro I'm I really distinguish between those. I'm just saying you're literally selling a dollar for 25¢. You're asking and you're acting like it's a miracle that people are coming and taking you from you. No shit. Like, I would do that deal all day. We've seen it in all the on demand ways. Homejoy was a class example and all these other things. So I believe in the AI stuff. I think it's we're on track. I think, Jordan, what you said about the NVIDIA chips and all that is is totally relevant. If you believe, though, we're you're in the second bucket, not in the first, where this is the last wave, and but there might be an like, it's not it's gonna take longer, there is going to be a dislocation because of the these dynamics that have been set up where there's so many companies that are these low margins, and, basically, they're all depending on this stack of seven, if you will, to keep these round tripping deals working.
Jordan Metzner [33:54]: I don't disagree with you, and that's where the question is. It's like, where in the stack is there permanence? Whether that's, like, at the NVIDIA level, even maybe a level higher of Or is
Hooman Radfar [34:02]: It By the way, they're gonna be fine. Yeah. So They're gonna be I'm not suggesting look. This thing's gonna like, what I'm telling you is, those big company like, OpenAI, maybe they will experience some stock compression at some point in the value. That's fine. That's what happened to Amazon. That's what happened to all these companies, and they became huge. What it's really gonna do is crunch the startup ecosystem, crunch it's like musical chairs. When the music stops, it's gonna crunch the weakest. These guys who are really powerful, for the most part, they probably have hit the escape velocity, they'll be okay. Like, NVIDIA will be fine. So because the AI trends that you're saying are fine. The fundamentals are fine. It's just it's gonna take long.
Jordan Metzner [34:36]: Yeah. I would just say, like, just to wrap up that point, in the last, like, twelve weeks, my engineering teams have moved from using Cursor exclusively with, Anthropic models to using Claude Code exclusively to using now OpenAI exclusively. And, what I mentioned to them is like, look, OpenAI is obviously subsidizing compute here and offering us, this Codex tool at a subsidized price. And we should take advantage of that. It's free dollars. And so what are we doing? We're maxing out the Codex usage because it's cheap as hell and it's really good. And, again, to your point, Hooman, like, I don't know if that will create enough dominance to force all the others out of the market, but if there's a new sexier, cheaper model out tomorrow, we'll switch to that one. You know? We got no loyalty. So
Hooman Radfar [35:26]: And look at all it's the same thing for some of these, I don't know, like, cogen platforms that are, I would say, more user facing, like, Lovable, Replit. I'm not they could be fine. Like, the Replicios, Gangster, and all these guys are good. So they have to hit this escape velocity where they move from everyone's trying it, everyone's using it because there's four or five that are working, and they're prototyping to, okay, this is actually part of my stack. Right? I'm stuck. It's in there. And I don't know a single one of them yet that is an irreplaceable part of any of my company stacks that I've seen. Everyone's using them, so they had the right they started there. And so that's that's to the point there. For what we have, and the good news, bad news for Collective style companies, we're in an area that's not in the crosshairs. Like, OpenAI, Google, and what have you, they're they're they're fighting a different battle. Right? They're finding fighting the foundational battles. And code, for example, they have to fight.
Hooman Radfar [36:19]: Because whoever wins the code battle kind of gets you have that, like, looping, if you will, where I have better coding tools, which means I can make my, better, faster. Eventually, it's coding itself, Devin style, and, like, you can't lose that battle. That is, an existential battle. But on our case, we have a huge TAM. You know? $100,000,000,000 plus, but Intuit would be the incumbent. Now you know what I mean? Like, okay. That feels fair. I can deal with that. You know? Not to put down Intuit. It's it's a strong company, but that's not like, I'm going up against Sam Altman in the thing he said he's gonna do. He said he's gonna own coding and all these guys, like, that's that's a tough battle.
Jordan Metzner [36:55]: Well, I think that's your I mean, honestly, just wrapping up on Collective, that's a huge competitive advantage for you guys is being able to integrate AI while big companies like Intuit will be super slow to integrate. And that, that will just make your platform so much better, and I think allow you to bring, more more customers over.
Hooman Radfar [37:10]: We are like to use a political analogy, I think if you look at one of the reasons The United States succeeded, part of it, obviously, is I think it's an innovative country, and it's great, but we were surrounded by the two oceans. And when World War one happened, when World War two happened, it didn't hit us, and so we were the only supplier left standing. And so everyone that we watch is going to war, and there's this massive battle, and we're just sitting there quietly building up something for a group of people that has been classically very overlooked. Even now, as much as it's sexy and people talk about billion dollar business one, how many venture backed companies do you see in my space? They're not. They're all like, I'm gonna build an agent to do this. Like, I've seen, like, 50,000 secretary agents and 50,000 video editing agents and all this stuff. Those are tough battles. They're worth it. I'm not suggesting I wouldn't fight as an entrepreneur, but I'm not fighting that battle.
Jordan Metzner [37:59]: Awesome, man. Well, this was an awesome episode. Love to show you off Collective and just for you to talk about your opinion here on the thoughts on AI and the market. Sam, maybe you wanna wrap it up?
Sam Nadler [38:11]: Yeah. Great episode. Thanks for joining. And as always, we have new episodes every Friday covering the latest in AI tech and something we've built. And thanks for joining, Hooman.
Hooman Radfar [38:24]: Thanks, guys, for having me. Was fun. And Jordan, way to go, man. You never cease to amaze me.
Jordan Metzner [38:28]: Thanks, man.
