AI or Bust: Software Founders Pick Investment Over Near-Term Profit

Investors are getting skittish about the bets a few companies are making to own the future of AI. It’s a mini-theme for November; Meta stock fell from about $750 a share before its earnings report to about $610 now, in part because of that kind of spending.

This week a couple more founders of public software companies joined the chorus. I spoke with one, Duolingo CEO Luis von Ahn, about his report. The news from the other, DoorDash CEO Tony Xu, sent me back to the Fortt Knox archives for something he told me eight years ago when we first met.

If you’d like to join me – and peers – for deeper conversations on innovation and leadership, get on this list for Fortt Knox Executive Communities, launching soon: mba.fortt.com.

Duolingo

Duolingo shares fell after Founder and CEO Luis von Ahn told investors he’s prioritizing growth over near-term profit because of enormous potential he sees for Duolingo in AI. Here’s what he told me on earnings day:

There are experiments that put monetization and user growth at odds. And part of my job has been always arbitrating between these two. If there’s a trade off to be made, how do we make that trade off?

What we’ve been doing over the last couple of months is we are really shifting that trade off to be much more towards user growth, again, because what we want to do is we want to grow rapidly. I mean, we’re growing daily active users 36% year over year in this quarter. We want to continue growing rapidly for a long period of time.

And we think that will allow us to reach the full impact of this business, which is much larger than anything that we have right now. So basically what you’re seeing is a much more longer term view from us than in the past.

Investors need to remember the early 2000s when Jeff Bezos did exactly this under very different circumstances. The circumstances then were, we had this internet buildout happening, e-commerce was coming to life, and a lot of people doubted that Amazon had the right model.

As a matter of fact, eBay’s model looked a lot better because they didn’t own these expensive warehouses. They weren’t dealing with logistics. They just sort of put buyers and sellers together in this really neat, nifty auction format that was really highly profitable. And of course, Wall Street loved that. They did not love these losses out of Amazon building out all of these warehouses and spending all this money on robots. It seemed just like a money hole to a lot of investors.

Well, Jeff Bezos believed that longer term, this would build him a moat in e-commerce where he would be able to provide better, higher quality service, drive loyalty, drive repeat visits, get to know customer preferences better through the earlier versions of AI that Amazon was using on the platform. And he ended up being right. But not before there was this huge trough of doubt that you see reflected in Amazon’s stock in the early 2000s.

Now, Duolingo was trading at around $260 a share not long ago before this latest earnings report. It’s down at around $185 a share today. And part of the reason why is investors don’t like that those profits that they had been expecting out of Duolingo just aren’t there.

Because Luis von Ahn is saying we’re going to invest in deeper versions of teaching. We’re going to invest in AI platforms because we believe that’s going to be a differentiator for us in the long term. We’ve got this huge opportunity, not just with the Owl teaching languages, but now with chess, now with other things. We really believe we have an opportunity to distinguish ourselves as an AI learning platform into the future.

Right now, investors don’t like that. But this is a very similar playbook to what we’ve seen other founders take in platform paradigm shift moments in tech in the past.

DoorDash

From my Fortt Knox 1:1 conversation with DoorDash Cofounder and CEO Tony Xu in March 2018:

Tony: I didn’t start my career at DoorDash with much experience of management, but I knew a thing or two about numbers. And one of the things that we believe at DoorDash is that information should be free, and that allows people to have the same information and context to make a decision and also allows us to go fast.

Jon: Information should be free?

Tony: Yeah and –

Jon: Like within the organization? You’re not publishing all your numbers for –

Tony: Information to be free within the organization so that everyone can make decisions. One of the early things that we did was we taught SQL to especially folks who did not have a background in programing or in engineering. That way everyone could get access to the data. Everyone could write their own queries to find information that they needed to make decisions for the business. As a result, we moved very fast that way. And it’s how we really made, in practice, true the approach of saying “data and insights win arguments.”

Tony’s doing it again.

Once again, earlier this week, DoorDash stock was at $238. Now it’s at $198. Because after DoorDash announced earnings, people saw that those profit numbers were not what they expected. And the reason why, in part: a DoorDash spokesperson telling me, we’re going to invest in a common data platform across DoorDash, the core business; Deliveroo, the acquisition that they recently closed; and Wolt, which they bolted on a couple of years ago, a European version of DoorDash.

What DoorDash is saying is, we’ve got to invest in having this common data platform that we can build on top of to make our organization more nimble over time. That goes back to those same roots of what Tony was telling me there in March of 2018, before the pandemic, before Doordash’s IPO, that they run their business on data and their expectation continues to be that as they continue to expand outside of restaurant delivery into more convenience delivery – now they’re delivering flowers and other things, just all kinds of last mile delivery – they need to be able to do that on a global scale on a common platform, and that’s going to take investment.

This harkens back, in a way, to what Zuckerberg is saying to his troops this week, which is that, yes, we are spending these tens of billions of dollars on AI infrastructure, and maybe it won’t pan out the way we think as soon as we think. But if it doesn’t and we have this winter in investment and in the markets, our cash flow is great enough that we’re going to survive better than the competition out there.

The odds for the founder, who started with nothing and has now built this amazingly successful organization, are different from the odds for the retail investor sitting at home. The founder is like, okay, now I’m swinging for home runs every time I’m at bat because I already have a bunch of pennants. And people are coming to expect me to hit the home runs. Investors might want singles and doubles, but that’s not what Zuckerberg, what Tony Xu and what Luis von Ahn are in for right now.

If you’d like to join me – and peers – for deeper conversations on innovation and leadership, get on this list for Fortt Knox Executive Communities, launching soon: mba.fortt.com.