Last year AI companies attracted more than $10.8 billion in funding from venture capitalists like me. AI has the ability to enable smarter decision-making. It allows entrepreneurs and innovators to create products of great value to the customer. So why don’t I don’t focus on investing in AI?
During the AI boom of the 1980s, the field also enjoyed a great deal of hype and rapid investment. Rather than considering the value of individual startups’ ideas, investors were looking for interesting technologies to fund. This is why most of the first generation of AI companies have already disappeared. Companies like Symbolics, Intellicorp, and Gensym — AI companies founded in the ’80s — have all transformed or gone defunct.
And here we are again, nearly 40 years later, facing the same issues.
Though the technology is more sophisticated today, one fundamental truth remains: AI does not intrinsically create consumer value. This is why I don’t invest in AI or “deep tech.” Instead, I invest in deep value.
The problem with investing in AI verticals
Since 2000, there has been a six-fold increase in venture capital investment in AI. The number of active AI startups has followed suit, growing 14-fold in the same amount of time.
But the capabilities of AI technology are often over-promised and over-hyped — and the domains AI startups are targeting could be more impactful. Do we really need a WordPress page developed by AI? By focusing on the technology, deep tech verticals — such as AI or blockchain-only startups — are ignoring the most commercially valuable part of a startup: What problem are they solving? What deep value are they creating?
Many startups are getting caught in the hype.
Pitched as an “AI tailor,” Original Stitch claimed it was able to deliver tailored shirts by using computer-vision software to analyze photos uploaded to the company’s website. Original Stitch generated $5 million in big-name investments. Unfortunately, the shirts produced using Original Stitch’s AI were poorly fitted — many were made too tight, or the sleeves were too long — and the company ultimately had to ask customers to submit their shirt sizes. I believe, one day, our shirts will be better custom tailored by machines — AI-powered or not is irrelevant to me — what I care about is a well-fitted shirt. Though developments and breakthroughs continue, AI systems are far from perfect, and if a startup cannot create value with deep tech or significant technology, the product itself may not be necessary.
Instead, I choose to invest in companies that leverage AI to deliver deep value to their customers.
Future proofing: Focus on creating deep value
Today, calling your company an AI startup is one of the quickest ways to signify that you are a forward-thinking, commercially-sustainable company. But being future-proof doesn’t necessarily mean having futuristic technology; in fact, having a good business model with humble everyday technology is often more sustainable in the long term.
Consider the seven most valuable companies in the world: Apple, Amazon, Alphabet, Microsoft, Facebook, Alibaba, and Tencent. Today, those seven companies are doing research in AI and other deep-tech software, but most of them didn’t start off as deep tech companies. Instead, they began by trying to solve a problem using “shallow” technology.
Alibaba and Amazon were eCommerce platforms, and Tencent (WeChat) was an internet chat system; all three are now heavily invested in researching and acquiring new and innovative technologies that will help them to continue expanding their brands.
What does that tell you? When you invest in a company, don’t look for deep tech, look for deep value. If deep tech becomes necessary or valuable, it will follow in due course.
An investor looking at funding deep-tech technology would not have invested in Facebook 15 years ago. Facebook was a social network built on PHP, the simple scripting language that half the web is built on. But in the years since Facebook launched, the company has built deep technology into its product, leveraging new innovations to expand its value and make its product better, all on the foundation of delivering deep value to its customers.
Similar stories can be found across Southeast Asia, with the likes of Grab and GO-JEK, which took their inspiration from Uber and Lyft. Today, they are among the most valuable companies in the region.
Deep tech as a standard in the future
Investing in deep tech comes with another issue: The same technology that seems cutting edge today will become standard over time.
Not long ago, developments like websites and high-resolution screens were both novel and technically interesting. Today, they are ubiquitous and universally available. We are at a similar point with today’s deep tech. Bitcoin and cryptocurrency, next-generation solar cells, SpaceX’s reusable rockets: these are all functional technologies and will inevitably become standard components over time.
For example, when I was running Interwoven, a content management software firm, we talked for years about how important XML was. Our XML-based document management system, TeamXML, was released in 2001 and disbanded by 2007. Now, there are zero companies built on creating value on XML alone. Companies use it, but it is not a central part of the infrastructure.
When making investments, I think of the future, where I want to go, and what value I believe can be created. Then, and only then, do I consider whether AI and deep tech are necessarily involved in creating that future and that value. It’s not about whether you’re “into” AI; it’s about whether you’re into long-lasting value.