There is a gold rush in the making as investors are having their minds blown by not only what generative AI can do, but the speed, resources, and aggression that incumbents and startups alike are committing to capture the value the technology is capable of creating.
Of course, venture investors are all over this trend, trying to move equally fast to capture the opportunity to raise funds and to allocate those funds. And as is the case with all new technologies that explode onto the scene, there will be a lot of bad investments. Here are some thoughts for those convinced that this is their opportunity for generational wealth because they heard it from a cab driver who read it in The NY Post:
1. Yes, there will be a lot of value creation based on the pure efficiency of a technology that speeds the time to completion of process-driven activities, but make sure investments are in companies with a business model that has the ability to actually capture that value. If there are, for example, 20 companies that suggest a blog post topic and then write it, chances are folks won’t be paying much for it. That’s value creation without value capture. And by the way, no matter how much computer-generated content is created, I still only have two eyes and my ability to consume it remains capped.
2. Try to make sure that investments are in companies that own their own tech stack. Open-source is okay, but if the secret sauce of a company is OpenAI’s Chat-GPT, then who knows what they may decide to do with it or what partner with more money may come along and blow the best-laid plans of a startup out of the water.
3. Give a lot of scrutiny to platform technologies. Investments in companies that make tools that Amazon, Microsoft, or Google could simply develop and give away for free as part of their offering will look great today then be worth very little tomorrow when the incumbent product announcement hits.
4. Beware of initial usage statistics. It wouldn’t be surprising to see folks talking to a chatbot an hour a day. An investor might think, ‘Holy cow! This is going to be bigger than Snapchat’. Remember that this is a shiny new object. It has novelty. People seek out novelty. And just like the hot new restaurant in town, once it has been tried and the novelty has worn off, it is possible people may go back less frequently, or not at all. The idea the company has may still be great, but not worth the pre-money value of Snapchat.
There are plenty more mistakes to be made. There will be insane valuations, FOMA, and syndicates of supposedly knowledgeable investors (who must know what they are doing, but don’t) that need to be navigated as the decisions about capital allocation are made.
Welcome to the Boomtown. Caveat emptor!
Lytical Ventures is a New York City-based venture firm investing in Enterprise Intelligence, comprising cybersecurity, data analytics, and artificial intelligence. Lytical’s professionals have decades of experience in direct investing generally and in Corporate Intelligence specifically.