Re-Founding Incumbents for the AI Era with Sequence Holdings Co-Founder and CEO Michael Lee

No Priors: Artificial Intelligence | Technology | Startups

Michael Lee, CEO of Sequence Holdings, discusses his strategy for 're-founding' legacy incumbents through frontier engineering and AI. He details

Key takeaways

• Sequence Holdings completed a $7.7 billion take-private of Baldwin alongside the Dell Family Office.
• The 'Atlas' platform architecture consists of four layers: data ontology, agent builder, orchestration engine (Lattice), and application builder (Artifacts).

Main topics

• AI Transformation of Incumbents
• Sequence Holdings Business Model

Notable quotes

In a world where you believe that alpha comes from engineering and AI, you need to create a culture whereby the celebrated persona is the engineer.

Conclusion

The episode provides a compelling blueprint for how established indust

Transcript preview

Speaker 2 (0:00) Every company on the planet has a celebrated persona. In a world where you believe that alpha comes from engineering and AI, you need to create a culture whereby the celebrated persona is the engineer. And that's what's required. You think about your typical investment in a fund, and you're typically trying to figure out how do we start to package to sell this thing in three years. That is just a very different framing for how we think about technological transformation and what are the investments you're willing to bring to bear here. What we do is scarce. We're trying to do one deal per year. That's it. Our job is to do one. Speaker 1 (0:33) Hi, listeners. Welcome back to No Priors. Today, I'm here with Michael Lee, co-founder and CEO of Sequence Holdings. They just announced the largest AI take private to date with the Dell family office of Baldwin for $7.7 billion. We talk about this, the Sequence story, how AI transformation is actually going to permeate the economy and what transfers from public investing to private equity to operating. Welcome, Michael. Michael, thanks for doing this. Speaker 2 (1:00) Thanks for having me. Speaker 1 (1:02) So you started Sequence Holdings, which is a permanent holding company that works with management teams to buy and refound their businesses to be market leaders with AI. We should talk about that. It's a very exciting model. But you also announced this big transaction in Baldwin. Tell us about it. Speaker 2 (1:18) Yeah, you know, we started the company 20 months ago, really with an eye towards can we partner with world-class businesses and management teams, working closely with our frontier engineering team to forge market leaders. Speaker 2 (1:31) The brokerage space is an area that we've been spending a lot of time on since the founding of the business. We've met dozens of insurance brokers, and Baldwin was truly N of 1 of all the insurance brokers that we've met. It's been a privilege over the last few months to spend a lot of time with Trevor Baldwin and the management team, and we could not be more excited about the journey that lies ahead between us, the Baldwin team, and the Dell family office that supported us in this transaction. Speaker 1 (1:54) I want to zoom all the way out to a little bit about, you know, your background, you and your co-founder, Alex, how this idea for Sequence came about, because you've been, you know, an investor now, you know, a hybrid investor operator. Like, tell me about how you arrived at the idea to begin with. Speaker 2 (2:08) You know, when I first joined Lone Pine in 2017, one of the first areas I was asked to cover was AI. Speaker 1 (2:15) That's actually quite early. It Speaker 2 (2:17) was, you know, as I'm sure you recall, it's kind of when AlphaGo came out. It's actually when the first Transformer paper came out. And there was a lot of excitement at the time around what would be commercially viable if you scale these architectures. And at the time, these were convolutional neural nets, GANs, LSTMs, and the like. And, you know, I think we all know how the story ends, which is we obviously saw a lot of exciting things come out of it. But as you scale these architectures, there are degrading effects over time Speaker 1 (2:41) to Speaker 2 (2:41) scale. You know, I share that context because, you know, when the models came out or ChatGPT came out at the end of 22, you know, what became obvious to me, at least, is that the world had forever changed. You know, we finally had an architecture that we knew could scale infinitely. Now, whether or not that was possible, what will come from that was not clear, but we did know that we could scale with compute that the architecture would improve. And, you know, like an investor, I started to think about what were the impacts to the world. I kind of felt strongly that AI would have an uneven impact on the economy. There are certain parts of the economy that I felt that AI just wouldn't impact at all, right? Take restaurants, golf courses, things like that. There are certain industries that I just felt like a startup would win, right? Take coding, for example, like conviction and sequence going to go buy and outsource coding services business feels like a terrible idea, which will give money to cognition or to anthropic. But as a student of business, there have always been certain industries where I felt like the incumbent had all the advantages. And that could be brand, that could be scale, network effects, regulatory. And in light of what is going to be the biggest technological shift of our lifetime, I felt very strongly that if you could acquire the right incumbent, inherit the advantages of being that incumbent, could you forge the market leader? And the kernel of that idea is the one that really is upon which Sequence was founded upon. Came up with the idea in early 23, had a handful of people try to get me to leave Lone Pine and go do it then. Just wasn't the right time for me. And then I remember going for a walk with my wife in 24, letting her know that, hey, it's pretty rare in life to be in the middle of the most important technological change of our lifetime. Having the kernel of my idea, I felt very strongly about and feel very strongly that I could pull together the team to go and pull it off. And so that's why we started Sequence. And couldn't be more excited about kind of what we've been able to achieve to date and kind of what we see ahead of us. Speaker 1 (4:36) It's a super first principles approach to, you know, what is the macro chain to this happening technology? How's it going to impact the economy? But, you know, many investors, at least venture investors, would be like. oh no, incumbents have a bunch of advantages. I guess it's just not for us. How did you think about, you know, scale and the idea of being able to engage with or even own incumbents? That's a, I guess you can just do things, but that's an ambitious premise. I think Speaker 2 (5:06) it's more just, it's the business model that meets the opportunity today. So like if you take a giant step back, you know, at least at Sequence, when we think about what's happening with AI today. We think we're living through the equivalence of the next industrial revolution. And what we generally see in most enterprises, what I typically see from a lot of the software companies that are producing AI agents today, is this giant push to give small machines to every human in the human assembly line Speaker 1 (5:33) and Speaker 2 (5:34) to speed up work. And there's nothing wrong with that. That's great. It's better than nothing. But as you know, when you have machines that can work 24-7, that can scale with electricity, that can accomplish what no individual human or group of humans can do, the right answer is to think about how you start to reorganize what an organization should be to meet the opportunity of what's available today with technology. And that's the context upon which we're sitting in. And I think really in the first time, we have a real opportunity here to partner with amazing companies, with great leadership teams, partnering with our platform and our engineering team, and really thinking critically around how do we... reorganize the organization? How do we lean into what's best in terms of what these, the technology can do? What can humans do and rethink how we can compete in these various industries? And I think it's just really more of an opportunity piece more so than an ambition piece in that, like, I just think this has to happen and I don't see it a natural way for it to happen unless you do it. through our approach. Can Speaker 1 (6:32) you talk a little bit about the structure of the company? Like why a permanent holding company? You know, what does ownership enable you to do that being a, you know, a vendor or partner doesn't? Speaker 2 (6:43) Yeah, I think there's two parts to that question. So in terms of like the holding company structure itself, you know, when I thought about what is required to accomplish what Sequence Holdings wants to do. which is how do we partner with world-class organizations? How do we bring frontier engineering to bear? How do we build a platform that we can share across all of our portfolio companies? The only natural way to do this was through a holding company. How do we build a business whereby we can forge market leaders? How do we align the duration of capital with the sustained investment and operational commitments that are going to be required to drive the transformation end-to-end? How do we create... an organization that culturally is oriented around forging market leaders, not deploying capital. And lastly, like how do you create the right structure upon which you can take the retained earnings in your business to rethink about how do you support your existing companies and net new investments? And so when I think about the opportunities in front of us, the only natural way to go do this was through a holding company. In terms of your second question around like ownership, you know, let's maybe just play this out through an example. Let's say that you're an incredible business. Yeah, I won't pick on one. Let's say we're a Fortune 500 company. You have unlimited resources. If I challenge you to say, hey, you're the CEO of this Fortune 500 company today and your job is to refound yourself, you're stuck with three options. Speaker 2 (8:05) One is I'm going to go do it myself. The structural challenge with that, and it's not a bad one, is just it's impossible to recruit and retain the talent required to go and do this refounding. And the answer to that is actually much more obvious than people think, which is every company on the planet has a celebrated persona. So let's take Blackstone, for example, an incredible organization, one that I admire a lot. And in fact, I make every person a sequence for King of Capital. But the celebrated persona at Blackstone is the investor. Speaker 1 (8:35) And Speaker 2 (8:36) that's why they're able to aggregate the greatest investors in the world. In a world where you believe that alpha comes from engineering and AI, you need to create a culture whereby the celebrated persona is the engineer. And that's what's required. It's the reason why does Palantir exist? I'm sure Alex Karp would hate how I would describe this, but it is foundationally an organization that has aggregated world-class engineers that celebrates the engineer. And foundationally what they do is it's a wrapper to sell it to other organizations that are not able to get that talent. So that leads me to my second point. So if you can't get the talent to do it yourself, then there's this huge multi-trillion dollar industry that got formed called the services industry. And these are great companies, Accenture, McKinsey, Palantir, that do celebrate the engineer, that do celebrate change in technology. But the challenge that you have when you partner with a services provider in terms of rethinking and refounding your business is an incentives problem. Services companies optimize for kind of three things, getting in your wallet, staying in your wallet, growing the share of your wallet. It is a path towards incrementalism. To compound that, services providers can't actually change the things that you really need to really kind of meet the moment. How do you change how the people are organized, who's working in these organizations, and the incentives? And so if you can't do it yourself, you can't use vendors, then you have the third option, which is what a lot of people do, which is they go buy software. The challenge with buying software is twofold. The obvious one is that it's beta. If it's available to everybody, it's available to everybody. I think the part that's more nuanced that I think people often miss is that if you and I were starting a software company, the thing we would optimize for is what is a workflow that's reasonably homogenous that exists in a lot of places? And then how do we install it fast enough, but deeply enough such that we can sell a lot, but it's sticky? Those are the genetics. Structurally, yes. Speaker 1 (10:32) That sounds very attractive. That'd be the genetics of what we'd look for. Speaker 2 (10:34) What that means, though, is that you're always going to sell to a workflow as it's designed today, as the humans are set up in that human assembly line today. It's the only way you can sell a product. You can't sell a product around a new human assembly line that doesn't exist today because that's how you think it is. And so when we think about why does our motion work, it's how do you have ownership so