What’s Your AI Shelf Life? Here’s 3 Winning AI Startup Strategies
Take One of These Approaches: Venture Down, Venture Out or Venture Deep
April 8, 2024 by Clint Chao, Moment Ventures
These days it seems that every company is focused on AI, which you might agree with if you sat through all 260 pitches in the latest crop of impressive startups at YC demo day last week. Certainly, AI is positioned to be one of the biggest shifts in our professional lifetimes, but one of the things that has me scratching my head a bit is this: many AI startup pitches I hear sound incredibly compelling when first presented. But if I review these same startups just 3 months later, I often find that innovation has changed so much in the meantime, that those AI value propositions are already starting to sound outdated or mundane. Furthermore, unlike earlier technology waves such as self-driving cars or the shift to cloud computing, the AI revolution isn’t catching anyone off guard or in a state of denial this time around, as every company on the planet likely has AI splattered across their war room walls.
The big incumbents are pouring resources into their own AI innovations, so leading companies (who are traditionally the acquirers of trailblazing startups) are well-aware of the potential that AI holds and not likely to get spooked by most AI-based startups coming out these days. Does that mean we won’t be seeing any early preemptive M&A strikes in AI (as we saw with previous tech movements with Cruise/GM, Instagram & WhatsApp/Facebook, Jet.com/Walmart)? We’ll certainly have outliers, but how do early-stage venture funds deal with this when they’re typically looking to invest in and hold investments for 5, maybe 10 years?
It’s silly to have to say this, but the ultimate ripeness test on any AI startup (or any startup at all) is to build something that has the ability to stand the test of time by consistently winning over lots of customers. So how does a startup tackle AI and manage to do this when there are technology leapfroggers coming at them with every passing month in this AI revolution?
The 3 Types of Winning Startup AI Strategies
In my opinion, there are 3 primary ways to win in AI if you are a startup, and these approaches frame how we are looking at pre-seed and seed opportunities: Venture Down, Venture Out, or Venture Deep.
Venture Down: Nvidia isn’t the only company indexed to the overall success and adoption of AI! Dive deep into developing next-generation software infrastructure to make AI easier for the other companies to work with. Build the foundational elements that lift the entire AI ecosystem. By focusing on core tools, platforms, or frameworks, startups can contribute to the biggest ‘rising tide lifting all boats’ phenomenon that we’ve seen in years. The key here is offering a solution that makes it simpler or more efficient for others to build their AI applications on top of, and selling it to them in the most efficient way. And if you can carve out an interesting space, there are lots of established players in the IT space that would love to expand their footprint to cover as much AI ground as possible. This worked pretty well the last time around when everything moved to the cloud. Here are some examples of companies we’ve backed in this category.
Venture Out: Build a company that can venture out into uncharted industries or domains to gather valuable data. Entrepreneurs who have a keen understanding of the nuances of healthcare, agriculture, logistics, travel, energy and more can find ways to explore hard-to-reach places that generate a lot of rich data to build a moat around uniquely capturing that information. And once you have it, everyone will need and want it. What kinds of insights can you enable your customers to derive, and can they enhance their own offering on top of those insights? Owning this process of data mining should not only help future proof you from any other data collectors that emerge, but you can enrich any LLM that finds its way into the mainstream, and that should certainly be revenue-worthy. Here are some companies that we have found doing this.
Venture Deep: Pick an interesting niche market or affinity group, and show that you understand the unique challenges of that space by developing AI-enabled services tailored to address them. The thing about AI is that it is destined to impact every single industry or domain, but many companies have neither the expertise or bandwidth to custom-fit a more generic AI solution to serve their needs. So if you’re honing in on something purpose-built for a specific group, build something where you win if you help them win, and then find a means to effectively make a run at the whole the table on that space so long as it is big enough to warrant a purpose-built offering. That means that if you are going to build AI specifically for immigration lawyers, or Chiefs of Staff, or travel bookers, build something that fully meets their needs, including the nuanced corner case features that are specific to their space, then show that you can go deep by converting tons of these businesses into customers super efficiently. Bonus points for you if you can win here without saying “AI”! By winning over numerous customers in a vertical, startups can establish themselves as indispensable solution providers.
The Future of Industries Depends on AI
At the end of the day, when you view AI as a utility as opposed to its own industry, you’ll realize that AI is simply a supercharged approach to solving massive and everyday problems that used to take a lot of technology, expense and people to solve. Entrepreneurs from the traditional IT industry will rearchitect the software stacks sitting above powerful semiconductors to unleash a new generation of AI infrastructure startups. Those with a unique vantage point into other large industries are well positioned to provide deep sets of insightful data or purpose-built solutions to meet everyday operational needs of a given industry.
To us, that’s the next chapter of the Future of Industries thesis that has shaped our investment approach since we started our company. Success in the AI game isn’t about catching anyone by surprise; it’s about creating lasting value in a landscape where innovation is constant, and finding an efficient way to sell it to your target customer base. Let us know if you are approaching the AI revolution in one of these ways!
Clint Chao is a General Partner at Moment Ventures, an early-stage venture capital fund based in Palo Alto, CA. You can reach/follow him on LinkedIn, Medium and X.
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