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Good morning, AI-based tools will be a massive opportunity for calm companies, but a dud for VC. Here's my thesis:
1/ this market map will become an iconic case study of "was a feature not a product" with all of the value ultimately being split between the actual core AI platforms in the top left corner and incumbent software tools with distribution (mostly not shown) who will add AI features
2/ It's almost a meme/joke at this point, but the vast majority of these products are just (a) an API call to GPT-3 or similar platforms and (b) a thin layer of "prompt engineering"
This is the most nonexistent moat in the history of tech waves with no clear way to improve
3/ "prompt engineering" is a self-draining moat where you are quite literally teaching the underlying model how to directly deliver the value via future API calls. All margin will inevitably flow to the platforms or be competed away by infinite competition
5/
Adobe will own the AI-based image editing market
Office & Google Docs will own the AI-based writing market
Salesforce will be the best AI-enabled CRM
Shopify the best AI optimization and customer support
Zoom the best AI meeting summaries
... all with a few API calls
6/ The ONLY thing creating a short-term moat protecting companies from incumbents right now? The user bases of incumbents are too large, and the cost of AI tools is too high to roll out across them all. They are simply waiting for us to traverse down the cost curve
7/ That's one big reason this space will be a dud for the VC model. There simply won't be opportunities to absorb $100m of capital and generate $10B of long-term value on the other side. (except for OpenAI or true platform-level competitors)
8/ So how can entrepreneurs and investors win in this market? You simply must structure your company, strategy, and fund such that a $20m, $50m, or $100m outcome is a home run. Mega incumbents will win these categories, but they may do so via acquisitions at that scale.
9/ If you've raised $50m and either choose or are forced to turn down that $50m acquisition to "go big or go home"... you're gonna go home.
But, raise less than $1m, stay lean, build fast, and exit in a few years for a life-changing $10-20m/founder is a winning bet.
10/ We will probably do some investing in the space, but the big problem is that VCs are salivating over AI and will offer you more money at an eye-popping valuation. Those who get on that one-way train are toast. It's hard to turn down, but those who stay calm will win big.
11/ But, it gets even worse for VC and better for calm companies 🤩
What's the one area where professionals are actually using AI every day right now to become substantially more productive: writing code. Everyone is a 10x engineer overnight!
13/ Founders of calm companies, it's time to start setting our sights *very* high. What massive bloated incumbent tech companies still frustrate you to use? The odds are increasingly good you could take a small team and a little capital and build a fully-fledged competitor
14/ This is a disaster for VC mega funds because the next wave of great software companies simply won't bother with the alphabet soup of raising a Series B,C,D,E... They'll build IPO-worthy businesses with dozens of people and less than a few million of outside capital