Hype
Staying disciplined is hard.
With all the hype around "AI" or more specifically all the hype around gpt-3 enabled products, it's never been more important to stay disciplined with your investing thesis.
Moments like these create fortunes. A few of the 2,000 AI writers are amazing business. Most will die. A few of the AI image generators will make real $$. Most will die.
What makes this particular hype cycle difficult to get a pulse on is just how damn useful these products are. The last AI hype cycle I recall clearly was with images / video stuff 5-6 years ago when Tensorflow came out and Nvidia was the golden child of the AI revolution. A ton of fortunes were made. But after the initial hype died down, many companies went belly up because they were riding the hype, not a product.
Here's where you can get burned:
In the micro space:
A 3rd party api available to everyone (Open AI) is not a technology moat. It's a commodity. Your defensibility must be elsewhere. It must be in your application of the tech. I'm talking product, customer service, UX, etc. But don't pretend someone can't get similar results from Open AI with a little prompt hacking.
There will be a dearth of businesses listed on acquire.com and other marketplaces with a tiny product using gpt-3 that got some initial traction and want you to pay 4x or 5x. Maybe more. These little ones are tempting because in absolute dollar terms, they're interesting bets, but without further scrutiny, you might be buying the 476th tool in that category. I'm generally not worried (at all) about competition and have had some success buying / building in crowded spaces where a market already exists, but beware of what you're actually buying. There are a ton of eyeballs on this space, and a metric ton of founders are experimenting with new products in this space. Competition usually doesn't bother me but that's because the products are usually somewhat unique or have some differentiation. The big difference here again is that ALL of these products use the EXACT SAME api!
In the macro space:
Sometimes the product is actually playing in a winner takes all market. Careful here, Lyft looked like it could compete with Uber head on for years. Given the most recent earnings report + Lyft's stock price, many people were wrong. It's a winner take most market.
Many large companies and micro caps specifically will ride this AI hype cycle with BS press releases trying to catch a tailwind to recover from the Dec 2022 sell off.
Remember just how much time it takes for these things to play out in public markets. The average sales cycle for a Fortune 100 6-9 months. Sometimes longer. Be patient and if you're buying into the hype on an individual stock, do your homework about how exactly they're using this new tech and if there's real revenue there.
If you're a founder
Jesus christ, jump on this train, raise a boatload of cash, deploy it judiciously and never look back. If you have an existing company, find out where there is a real value add and layer it in. Forget all of the above. Go build something real and shoot your shot, now is the time!
Why the 180 if you're a founder? Raising $ is hard. Venture is an industry of followers, and if a category is hot, there is a lot of pressure at funds of all sizes to have bets in that category. Swimming against the tide of what people are willing to fund is a sure fire way to get stuck after your pre-seed without anyone to give you more cash after you run out. If you're a portfolio's category bet and you're showing traction, I'd say you've double your likelihood of getting a proper seed round. Please just don't take the highest valuation on the terms sheet.
Macro headwinds:
We're still in a weird economy. Hard landing? Soft landing? No landing? Should the fed have hiked 50 basis points earlier this month? Is the bear market over?
Public markets + interest rates affect startups. If fewer companies go public, the venture industry can't recycle winnings back into the ecosystem. It's like a traffic jam. Fortunately a lot of these funds raised in the peak of 2021 / 2022 and are flush with cash, but they're a little more diligent about what they're deploying into.
Stay diligent. Don't lose your marbles in the hype!
xo,
Andrew
