Re-Founding Incumbents for the AI Era with Sequence…

PodcastNo PriorsMichael LeeSep 24

Michael Lee sees AI as a major economic shift whose effects will often emerge through established businesses, if they can use the technology to redesign their organizations. He argues that doing so requires engineering-centered cultures, sustained capital, and leaders willing to change how work is organized. Examples from insurance, lending, and private equity illustrate how business incentives and time horizons can shape that transformation.

Artificial Intelligence Automation Venture Capital

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Key Takeaways

Lee sees AI as an industrial-revolution-scale technology whose effects will often reach people through established businesses, not only through model companies. Because AI-enabled machines can work continuously and scale with electricity, he argues that incumbents need to redesign their organizations to use the technology, rather than simply add it to existing workflows.

Lee argues that AI transformation requires engineering expertise to shape both company culture and organizational decisions, but several existing models can impede that shift: services firms may favor incremental client work, packaged software is built for current workflows, and PE firms can struggle to recruit engineers into investor-centered environments. He says companies pursuing AI-driven refounding should make engineers central to their culture.

Lee says Sequence’s holding-company structure is intended to share frontier engineering across partner and portfolio companies while matching capital duration to sustained operational commitments. That approach contrasts with his view that PE firms often begin preparing to sell after about three years, a timeframe he says differs from what technological transformation requires.

TECHNOLOGY

AI's Uneven Impact — Michael Lee says ChatGPT’s arrival in late 2022 changed his view of AI. He believed it introduced an architecture that could scale with compute and improve, and expected AI to affect the economy unevenly.

“You know, I share that context because, you know, when the models came out or ChatGPT came out at the end of twenty two, you know, what became obvious to…”—

AI and Incumbents — Lee argues that AI will often affect people’s daily lives through established businesses, even though model companies such as Anthropic, OpenAI, and xAI are foundational. He sees incumbents’ brand, scale, network effects, and regulatory position as potential foundations for market leaders if acquirers use AI to transform them.

“But there, 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…”—

Industrial Revolution — Michael Lee describes AI as the equivalent of a new industrial revolution.

“So like if we take a giant step back, you know, and at least at sequence, when we think about what's happening with AI today, we think we're living through…”—

ECONOMY

Insurance Profits — Lee says insurers have historically earned little from underwriting and most of their money through investing. He argues this incentivizes carriers to gather high-quality gross written premium.

“The insurance industry since the beginning of time has almost made no money underwriting and has made the principal amount of their money through investing…”—

Broker Payment Model — Lee describes insurance brokerage as a relationship-centric business in which the carrier, not the customer, pays the broker. He also says gross retention rates are 90%.

“Another interesting feature about the brokerage industry is that your customer doesn't actually pay you. The carrier does…”—

MARKETS

Take-Private Capital — Lee says a take-private requires certainty of capital because an equity commitment letter may require billions of dollars. He identifies this as a financing constraint for large transactions.

“You know, as you can imagine, in a take private scenario, you do need to have certainty of capital…”—

Long-Term Compounding — Lee says studying leading companies at Lone Pine reinforced his view that the greatest companies compound at rates people do not expect.

“And that was a really, really powerful kind of five years that I did at Lone Pine around studying the greatest companies in the world, and like really deeply internalizing…”—

Sequence's AI Buyout Thesis

Lee describes Sequence's Baldwin transaction and explains how his investment experience led him to believe AI could help incumbent businesses become market leaders.

AI's Uneven Economic Impact

Lee argues that AI will affect industries differently and that acquiring incumbents with durable advantages can be a path to building category leaders.

Why Sequence Owns Businesses

Lee says AI transformation requires redesigning organizations, and that a permanent holding company aligns ownership, engineering investment, and long time horizons.

Engineering-Led Transformation

Lee contrasts ownership with internal efforts, consultants, and off-the-shelf software, arguing that only an aligned, engineering-centered model can remake workflows and incentives.

Bank South's First Partnership

Lee explains how Bank South became Sequence's first investment and why the shift from a services engagement to ownership enabled deeper engineering work and employee buy-in.

Banking's Organizational Advantages

Lee says banking's clear rules, strong data, and centralized operations make it a useful environment for deploying agents and spreading technology across a business.

Insurance Brokerage's Incumbent Edge

Lee explains why brokerage fits Sequence's criteria: a huge market, relationship-driven retention, and structural advantages that make it difficult for startups to displace incumbents.

Atlas Platform and Change Management

Lee outlines Atlas's reusable data, agent, orchestration, and application layers, while stressing that employee trust and organizational change are the harder part of transformation.

Sequence Versus Private Equity

Lee distinguishes Sequence from fund-based firms through its long horizon, engineering-centered culture, selective deal pace, and focus on building market leaders.

Management Teams for AI Change

Lee prioritizes strong operators who already embrace technology and have taken steps such as centralizing data and introducing AI tools across their organizations.

Bank South's Lending Results

Lee reports that AI systems cut consumer underwriting time by 94% and shortened commercial loan processing, allowing Bank South to handle more volume without relaxing standards.

From Investing to Operating

Lee reflects on the empathy and resilience required to build a company, then describes how the Dell family office brought capital and support to the Baldwin transaction.

Backing Exceptional People

Lee concludes that execution depends on exceptional people tackling hard problems in large markets, citing Jensen Huang as an example of leadership and continual reinvention.