Episode 8: Scenario Thinking in the Age of AI: Jonathan Brill on Preparing for Disruption

In this episode of Inside CVC, futurist and innovation expert Jonathan Brill, author of Rogue Waves, joins Steve Schmith and Philipp Willigmann for a provocative conversation about navigating—and capitalizing on—radical change. From AI and demographic shifts to geopolitical volatility and supply chain resilience, Brill explains how corporate venture capital can create real value by investing ahead of disruption, not in spite of it. He shares strategies for scenario planning, insights on how CFOs and founders should rethink risk, and the mindset required to thrive in an uncertain world. If you're a corporate investor, strategist, or founder looking to future-proof your approach, this is a must-listen. 

Transcript

Steve: 0:00

Jonathan, thank you so much for joining Inside CVC today. How are you?

Jonathan: 0:06

I'm amazed that I'm here hanging out with you and my old friend, Philip. I'm really excited to be talking with you about the future of corporate venture capital.

Steve: 0:16

Yeah, I think it's going to be a wonderful conversation. Why don't we start today's conversation with your book, Rogue Waves. Talk to us a little bit about the thesis, the premise, and what your point of view, your recommendations are. Absolutely. So

Jonathan: 0:33

Rogue Waves came about working with HP and the venture capital capability within HP to figure out how to reposition the company. And my job there was to look at what's going to be happening more than three years out, more than five years out, so that our venture investments, among other investments, would scale to the time. The challenges we saw were that Organizations are not generally designed for the radical futures they're about to face. And those radical futures aren't a result of change typically in the environment that they've grown up in. They're a result of systemic change. What we're seeing... these days, is that more and more as we get more connected economically, as we get more connected socially, as we get more connected technologically, independent of the conversations of de-globalization, is that something that happens over there impacts us over here. And what happens more and more and more is that those disruptions collide. They appear at the same time in the same place. In the deep ocean, 100 foot tall Walls of water can pop up out of nowhere when exactly that happens, when there's a focusing event that causes multiple waves of disruption to collide. I think the same thing happens in business. I think the same thing happens in life. And I think the same thing is happening more and more and more frequently. And AI will only accelerate this trend.

Philipp: 2:06

Jonathan, I'm so happy to have you on the show. What you just laid out in terms of these different scenarios and how corporates can play with it or could use it as a framework obviously has been part of my professional journey quite a bit. And I was very intrigued in your book, how you talk about AI and how it is going to drive systematic change. For our listeners, can you talk a bit more about what other scenarios and other potential futures you are seeing on the horizon in combination with AI or also in addition to AI, what we would really have to be looking out for and potentially we have to be concerned about?

Jonathan: 2:48

Let's talk about that for a moment. I'm doing a talk with manufacturing executives who are dealing with U.S.-Canada tariffs, U.S.-China tariffs. I get on a plane, I land, I'm dealing with a financial institution in New York. There are no more tariffs that day. We're moving into a world of this radical disruption and this continuous disruption. And so what we need to think about is not what crazy thing can happen. happen next, but how would that impact us? How is that going to impact our finances? How is it going to impact our operations? How is it going to impact our environment? How is it going to impact our strategy? If any one of a dozen or a hundred things happens. And as venture investors and CVCs, what are the investments we can make that smooth out that disruption or allow us to lean into a range of disruptions? For our customers, for our clients, for our companies. And that's really the thing to be thinking about. Now, what are some of those trends that we need to be discussing? So the first one is with a lot of the changes in the US government, a lot of our forecasting capability has been disrupted. And so in places like agriculture, in places like manufacturing, we're going to see more supply chain shocks than we have historically. This is just simple math. We know that the cost of capital because of what's happening in the White House and in Washington is likely to go up. We know that because of this new globalization, according to Bloomberg, defense spending will go up something like 50, 5, 0% between now and 2030. And we know that we're going to see massive economic disruptions in the United States due to demographics, but even more so around the rest of the world as the population gets older. For instance, in California by 2030, there's a million person shortage of people with four-year degrees. With the deportation efforts that are going on to take illegal immigrants and push them back to South America, Latin America. We're going to see real issues in the services sector, which is what? Three quarters of the US economy. One of the major drivers within that sector is construction. I think something like a quarter of construction workers are illegal. What about hospitality? Not quite the same numbers, but similar kinds of numbers. What about agriculture? Who's going to be picking? We've got to really think through these things and what it does to our tax base, our revenue base, and how that drives the social services and how that drives the economic flexibility that our government has as it has to stimulate the economy in a population that is aging, is going to consume less per capita, not more.

Steve: 5:53

As I hear you describe those future scenarios, it occurred to me that leaders in corporate venture, the role that you described as the premise for the book, it becomes sort of two things, right? It becomes a responsibility to identify where the That's where the opportunities are three, four, five, six years down the line. Very traditional in corporate venture, in terms of seeking and growing innovation. But there also seems that part of this now is creating a foundation for flexibility because of that uncertainty, because of that disruption.

Jonathan: 6:35

That's where the growth opportunity is. When we take a look over a 14-year period that covered September 11th and the financial crash, what we saw was that companies that invested against disruption as opposed to investing against the stable state did dramatically better. And so it's this environmental disruption that is the opportunity. It is the leverage you create in preparation for that disruption that creates it. And so one of the places we can do that is in VC. Sure, you can have that moment, you know, where Yahoo does a seed investment in Alibaba that ends up being worth more than Yahoo. You know, that can happen. But the thing I know can happen is that you can look at these types of disruptions that happen and find ways to create value. In highly knowable situations that no one else has yet planned for. And I think those are the places, those are the wins that create the reliable hits on that three to five year basis, not trying to find the next Alibaba.

Philipp: 7:47

Jonathan, you are like a futurist. In the pre-conversations, you said you are a forecaster. I

Jonathan: 7:54

am not a forecaster. I do not know the future. Most of what I do is I look at history and quantitative analysis of history to understand the range of what has been possible in the past. and then use critical thinking to say, okay, what might be

Philipp: 8:09

different now? And with that, given that there's so much change and so much disruption, and I used in my past, I always use scenarios to draw these potential futures out there in 15, 20 years, which kind of helps you guide and what's your aspiration? Where do you want to go as a company? What do you need to build towards? But with all this fast change and disruptions, how can you use futurists and scenario planning nowadays to actually, you know, really draw value from it. Maybe you can share a little bit of your, you know, inside baseball, how you do it to really kind of like have impact there.

Jonathan: 8:47

That's a great question. So I'm always asking two questions. One is what if my facts were wrong and what if something new came to light? How would that change my opinion? Notice that I don't need to know which facts are wrong and I don't know what would have to come to light. to understand if my decision is still a good one. And so to me, that is one of the real powers of scenario planning is it allows you to really think through that range of not what's possible, but what are the impacts on you? And when we take a look out, it's really easy. A lot of futurists like to say, oh, in the year 2040, it's like, well, so much is gonna happen between now and 2040. Pretty quantifiably, we're going to see a number of things that are pretty terrifying. One, the global inversion of population demographics and the developed economies, ending historical methods of growth. Two, we're going to see the light off of artificial intelligence and we can Talk about what year it is, right? But it's like 2030 to 2035. It's not 2040, according to most estimations. That's going to impact the financial world because three quarters of the population in the United States is involved in services. Services historically have not seen tremendous labor productivity growth about one and a half times a year. or 1.5% a year, that's probably going to double or triple. And that's going to impact the tax base, right? There's going to be a lot of people in professional services, the people who pay for the mother load of taxes. Their jobs are going to change. The employment structure is going to change. And that's going to impact the way we do government. Social services is our population's age. It's going to change the way we do monetary policy. well before 2040. And so looking out at that far off future, science fiction is cute, but there's so much unknown out there. I can tell you that those things are highly likely between 2032 and 2035. And so we can quantify that and say, okay, given that world, where do I need to be positioned then? What's my competitive environment then? And what are the decisions I need to make in terms of how I scan today, how I plan today, and how I action today?

Philipp: 11:24

And thank you very much, Jonathan. That makes a ton of sense. And would you say in a world like this, when you have conversations with leaders and you speak at big conferences, is there like general... support if you kind of like lay out these scenarios or is there more skepticism because people are more and more questioning can they really see you know these trends can they really understand these uh developments or are they you know just afraid of of the the pure speed of change when you when you share this information with them

Jonathan: 11:56

You know, what I just shared with you is for your very special listeners, because I know they have a level of intellect and geek to them. That is not the large stage conversation, generally speaking. When I speak to leaders, this is often a shock to them. And, you know, what I would say is before COVID, we were saying that there's about a 12% chance of a pandemic like COVID coming out of a place like Wuhan because of things that we knew were going to happen in the frequency of the development of novel viruses in places like Wuhan, which is, by the way, why there's a Wuhan Institute of Virology in Wuhan. So we knew there was something like a 12% chance of that happening in any given year. And yet you look at Marsh, you look at the World Economic Forum, they said, hey, maybe it's 1%. When you sit down and you actually quantify this stuff, you end up with dramatically better answers than the people who are just putting their finger in the air and writing science fiction scenarios. What I would say is when we were talking about this in 2018, 2019, I talked to CEOs and C-suites and they look at me like I had three heads and they'd say, hey, you know, that's not the future that we're dealing with because it's not the thing we've experienced so far. What I see today is everybody believes that the future can be crazy. Like we've just gone through five years of it and it's just starting. What they next say is, well, you can't predict the future, which is effectively the same statement as before. What they're actually saying is, I do not want to spend the time to understand the range of what is possible.

Steve: 13:49

That's surprising. I'm curious, do you think COVID has changed thinking in terms of the what-ifs becoming reality?

Jonathan: 14:03

I think that people believes that the what-ifs can become reality, you know, in a much different way. The way I look at it, though, is a little bit different, right? So in the 20th century, we had about every quarter of major financial, operational, environmental, or strategic disruption in the United States. Okay, once a quarter. And we look at all of these things like they're edge cases. And about every seven years, they collided to create a rogue wave. And we spent probably three years, two and a half to three and a half years digging out of them. So about 45% of our time digging out of these things. And yet we look at them like they are edge cases. They're the main case. And we can know what the history of those rogue waves are, what the history of how we dug out of them are. And that can dramatically inform how we should play and where we can win moving forward. And the challenge is that I think executives lean on their 15, 20 year of executive history and say that is the range of what is possible as opposed to looking at the deeper history of what has happened maybe since the 1200s or 1500s when we start getting technological as a species and what has happened. Because that's the range we need to be looking at today. We are in a momentous time and looking at a three to five year window, 15 year window of ahistoric global harmonization is probably not the right segment of history to be looking at today.

Steve: 15:47

It's so interesting. I was listening to a local cable news station, and the anchor said something in reference to the quarter continues to be the stable measurement of business performance. And what I think we're talking about here is not only rogue waves, but they're coming more frequently, et cetera, et cetera. And that speed of business, I think, to what I'm understanding your point, how we measure performance, how we measure these things just clearly has to change.

Jonathan: 16:30

I'm not arguing for quarterly performance metrics. I think they keep everybody honest, but I do believe that the look out at quarterly performance metrics as a measure of value is very dangerous. What is it? Rita McGrath did a study that something like 1 in 2,600 or something, it's like that order of magnitude, companies hit both their margin and revenue targets every quarter over, I think, a five-year period. As an investor, this is insane to be expecting that to happen. And we've got to get out of it. When you take a look at the investors that are successful over the long term, they typically are. Warren Buffett isn't investing for the quarter. He did start pulling out capital in Q3 of last year, assuming that the crazy would happen in Q1 of this year. And nobody could quite figure out what he was doing. And yet, it was kind of obvious, right? Trump said what he was going to do, and then he did it.

Steve: 17:46

Yep, absolutely. I want to... talk about the government and this pace, et cetera, in a minute. But Philip, I've asked a couple of questions. Any questions from you?

Philipp: 17:58

Just to kind of bring it back a bit to the, you know, to the corporates and to startups. And I was on this talk earlier today and some people a very prolific AI expert was talking, Sam Altman gave a talk and it was all about the future of AI and what the developments are. Given what we just spoke about, right? I mean, we talked about the corporate side and what corporates can do, what, you know, from a CVC, the startups and the ventures, you know, CVCs invest in or partner is obviously our key component as well. Any thoughts from you guys on a founder right now, if you're a founder, how to look into the future? How can you actually embed resilience and adaptability in your plans, given that some of these big AI companies make a new release and the complete startup section could be eroded by it because they haven't seen it coming? Any thoughts on that?

Jonathan: 19:03

Yeah. So people ask me this question all the time. And I think it's a misunderstanding of how VC works and how VC thinks. Or private equity works and private equity thinks. These are portfolio plays. And what they want is a portfolio of risk that is relatively knowable. And so when your risk profile changes, it's not necessarily a good thing, right? Like, sure, they appreciate it when you outperform the market, but that wasn't the expectation. The expectation was that you don't underperform it. And so every single investment, right, is, you know, an egg in the basket. And they don't want your risk to change. And so they aren't necessarily as a startup going to reward portfolio investing strategies in the same way that you would an amalgamated firm, right? A Fortune 500. And so it's a slightly different issue. When I think about the challenges we are going to face in terms of AI, right? The technological path, right? There are a couple of things that we know that every year, depending on the type of model, we're seeing a nine to 900 times increase in cost efficiency of those models. And that's highly aligned to increases in energy efficiency. We know that we're seeing dramatic increases in the performance of those models and that there are a number of scaling laws that suggest that they will continue to get better for at least the next five years. in relatively knowable ways. We know that the challenges that we've had so far are really about the ability to hold information in memory and the ability to learn after training, to improve in quality after training. We're seeing real breakthroughs in both of those areas. And so I think that what we're going to see in the world of artificial intelligence is that AI will really start to solve creative problems. The latest model from DeepMind has done some stunning things in terms of mathematics, inventing new types of matrix math, increasing the efficiency of Google's data centers by almost 1%. If you know anything about data center efficiency, that's pretty stunning for a software just to invent a way to do that. We're moving into a very different world of AI. And so the question I think as a startup is not how do I compete on doing better AI than, you know, OpenAI, it's how do I do things that large AI organizations are not capable of competing in or that cross boundaries? So are there cyber physical systems that are important? It's really hard for them to cross those boundaries. Are there things that need to exist and be stable in the longer term than these companies are able to compete against? Those are important. Are there marketplace models where you have some level of trust or some thing that because all of the AI competitors are moving so fast, they can't build, you know, like what are those metrics that the AI competition can't play in because of who they are, right? The wolf, you know, the wolf is, you know, the wolf can never be a sheep.

Steve: 22:53

I want to talk a minute as you describe that about government. Obviously, certainly around regulation, but overall around AI regulation is going to play a pretty significant role, good, bad, or otherwise. In these sort of very disruptive scenarios that we have seen and that obviously are going to continue, government has historically had the brand of moving slow in these things. How is government going to keep pace with this? What needs to happen at the government level, either federally, at the state level, more locally? I mean, I'm sure there's also a global perspective there, but how does government keep pace to balance the need of innovation with the need of regulation?

Jonathan: 23:48

So the first thing I would say is, you know, you, you may or may not like Elon Musk and David Sachs, but they know what they're doing. Um, so I'm really grateful to have them in the positions they seem to be having, uh, because they, they can bring some, some Silicon Valley sanity to, to the regulatory offering. Um, So that's the first, I think, bit of sunlight on this, that it's not D.C. managing D.C. The second piece, and that's not a political perspective, by the way. I think it's just these are people who are active in the space and they're not policy wonks that are leading the conversation. The second piece is that I stopped... Maybe last year this time I stopped tracking how many regulatory efforts there were because it was up over 1600. And I think there were 27 states making AI regulatory efforts. That's obviously all just got to get harmonized. Historically, the way that works is California is the most consumer protective. And so that's what everybody kind of rallies around. I don't know that that's possible this time. And I don't know that that's possible across geographies. I don't know that it's in the interest of the EU to completely harmonize around the US, right? Certainly not in the interest of China to harmonize around the U.S. So we're going to see a lot more fracture for global firms. I think we're going to see a lot more regulatory fracture for national firms. And I don't know kind of what that looks like. The one digital example, and it's a little tweaky that I can think of in terms of this regulatory effort, is digital streaming of pornography, where from state to state you have different rules about what's possible, so on and so forth. And it causes real challenges for that industry in terms of how it does transaction, who it can bring on to its websites as customers. And it really limits growth. So I think that's going to happen. That kind of thing is going to have to happen in the AI world. And I don't know how it works because it's going to be across the entire IT stack. It's not just going to be a point service that people like or don't like or think is moral or immoral. It's going to be in everything and everywhere.

Philipp: 26:24

Staying on the political, make a geopolitical topic for a second. I'm currently in Vietnam. I was in Japan at Sushi Tech. I'm going to be in Singapore next week. And in the middle of it, the US government was in the Middle East, signing some massive deals in technology. what's your view on the implications of geopolitics, building regional ecosystems around innovation, driving innovation? And what's your thought on that? And how important will this be in also kind of like changing the past in terms of expediting traction on new technologies?

Jonathan: 27:12

That's a huge and complex question. So, My first question is you're a globalist, right? How far ahead, how much further ahead is Vietnam than you had in your head before you went the first time?

Philipp: 27:34

Well, I have to tell you when I came here, the first time was 15 years ago. When I came here last year, I was blown away. Less about the advances on technology, but much more around the cultural shift and the mindset the gross mindset of building, driving and creating something for the next generation and doing whatever is possible to use technology to do that. And which obviously gives a fantastic foundation for new technology and building new things here in the region. So I was mind blown by that.

Jonathan: 28:13

I'm mind blown. What's the name of the electric vehicle company over there, Vinstar?

Philipp: 28:19

Vinfast,

Jonathan: 28:20

yeah. Every first car is an electric vehicle

Philipp: 28:21

here.

Jonathan: 28:22

So this is a guy who made his money producing ramen noodles, gets into the electric car business, and is just pumping it on a global basis. Whether it's going to be successful or not, that's what's going on. You have these entrepreneurs who are just turbocharged. They're moving across industries. They're playing hard. They're playing with government. They're playing with military. And they're making it happen at speeds that are just not happening in the United States. And so to me, that's the first question, is on a national basis, how much of that happens in places with more youth capability like Vietnam, like Cambodia, to some extent like Indonesia, than the United States, and how hard, how fast can they play, and what does that mean for how they win? But in a place like Southeast Asia, there's a second issue, which is where's their resource, where's their defense, right? And so you end up, and where's their market? And so you end up in this interesting kind of game of what geopoliticians call salami slicing between the US, India and China. where everyone's just trying to take a little piece of that pie. And so you see in Vietnam, tensions and yet trade with China. You see in Cambodia, the installation of ports that are not military naval ports, but kind of are by the Chinese. You see gamesmanship in terms of the water flows of the Mekong River Delta. You see the investment in energy production in lao up in the north to um you know certainly provide energy production for the region but also to control the downflow stream of water these games are really hard they're really complex and and uh you know in those high growth potential areas and the new technology centers of the world um they are the defining characteristic of how that will work so in Southeast Asia, the question is, will ASEAN be strong? Will it be weak? How will it align with the Quad, US and India? How will it align with China? Can the Quad sustained over the next 15 years as India and the United States have different alignment interests. We're going to see. It's going to be really interesting. But the issues in terms of economic growth, unlike our lives to date, Philip, are defined by these geopolitical issues as much as the technological and demographic and economic issues.

Philipp: 31:15

Thank you, Jonathan. That makes sense. And I mean, we just want other topic to add to that. In terms of speed of adaption in the US and Europe, we talk about how many EV chargers do we need? Where do we put them? And from last year to this year, the amount of EV chargers in cities like Ho Chi Minh City and Hanoi, which literally just were put on streets, is just unbelievable. And they're just doing it. There's no debate and talk. They're just doing it and making it happen. which is also less in terms of like there's a willingness and there's a speed, which is fascinating what I've experienced here in Southeast Asia. But Steve, I'm handing it over to you.

Steve: 31:56

Yeah, Jonathan, thank you for your time and some wonderful perspective. I'd like to close with maybe some advice for investors. It seems like performance of investment has historically been measured on an axis of either how much or how long. And given the speed of this disruption, the influence, geopolitical influence, et cetera, curious if you've got some parting advice for investors on how to balance that short-term financial returns with those longer-term goals of building a sustainable business.

Jonathan: 32:40

I think I think the question for CBC is what does the CFO want, right? So I was keynoting at an M&A conference for Silicon Valley M&A and CFOs. And what was fascinating was. I talked about the next five years and the former presidents of a major semiconductor company got up and he literally high-fived me as I was getting off the stage. He's like, that's exactly what's happening. And then I went to talk to the M&A jockeys and they were like, that wasn't really relevant. And then I went to talk to the CFOs and they said, no, you were 100% on. That's what we need to be investing against. There's this disconnect, I think, between how we invest and particularly how we do M&A and to some extent how that ties to VC and what the CFO needs. What the CFO knows is that you have, what, a 20% hit rate and it hasn't gone up significantly for an M&A since, I mean, when I was in school, you know, 30 years now. It hasn't gone up. And yet that's the one thing that the CFO needs to know is, is this bet going to be successful? In a world of radical change, more and more of those bets will not be. And so the question becomes, how do we diversify our portfolios? How do we diversify our risk? And how do we do it not just to mitigate the disruption, but to lean into it, to lean into those financial, those operational, those environmental, and those strategic shifts one step before our competition. You don't necessarily need to be there in full before everyone, but you do want to have chips on the table. An example, not quite a VC example, but I think an instructional one, is after the Fukushima nuclear disaster, Toyota's operations were really impacted. They had a bunch of single source components that were produced in the area. So they stepped back and they said, okay, well, what would happen if we got someone else to buy the six month supply of the materials that we need and stockpile them? we'll guarantee we're going to purchase those out. And we're going to pay what? Prime plus one or some very minimal number for someone to hold those assets. The question that people asked at the time was, is that a good idea? And then COVID hit. And every single automotive manufacturer in the U.S., got hit by supply chain shortages. And that is the year that Toyota became the largest automobile manufacturer in the world. The year after COVID, they zoomed back. They did, I don't remember if it was 11 or 13% growth that year. My point is, if you just make little tweaks, little tweaks in terms of the potential of your organization, you don't even need to place the bet. You just need to put the chips on the table. You can create dramatic outcomes, even if you don't know that it's a pandemic or a war or an energy shock or a shipping issue moving forward. All of them will be solved by the same investment. And I think that's the secret is to look at your risks as portfolios, just like you look at your investments as portfolios. That's how you win what happens next.

Philipp: 36:27

Jonathan, thank you so much for your time. I think we could go on for another 30 or 60 minutes. So many different topics we touched on, but really appreciated you sharing with our audience your perspectives. I really encourage everybody to get your book. and use some of the tools and frameworks you laid out in the book to help us plan better for the future and be more prepared. And yeah, thanks so much again. And Steve, bring us home.

Steve: 37:00

Yeah, Jonathan, thank you very much. That parting advice. I think it was terrific, but I think it creates that balance, the balancing of the risk and the opportunity. So thanks so much. I appreciate your time, appreciate your insights, and thanks for joining us on Inside CVC.

Jonathan: 37:18

Absolutely. Thanks for having me and look forward to chatting with anybody who would like to. You can find me at jonathanbrill.com.