From Abundance Summit: How AI is shaking up the start-up ecosystem

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0:36Today, Raz's success is proof that with passion and the right support, it's possible to make your dreams a reality. Learn more at CapitalOne.com slash business cards. Hi there, it's Rana El-Khalyubi, host of Pioneers of AI. And we have something a little different for you today. If you're a weekly listener of The Pod, you've probably heard me talk about investing in AI. When I'm not guiding you through this AI frontier, I spend a lot of my time as an AI investor. I'm the managing partner at an early-stage venture fund called Blue Tulip Ventures, focused on investing in human-centric AI startups.

1:15I'm super passionate about identifying incredible founders of AI startups and supporting them on their entrepreneurial journey. But it's not something we talk a ton about on the podcast. We're changing that today. Last month, I got to sit down with two leading investors at Abundant Summit, an annual event hosted by Peter Diamandis, where entrepreneurs, investors and CEOs come together to learn about technologies like AI and create positive change. It was my third time and I love it. One of my highlights was championing the teen program. On stage, I was joined by two venture capital investors, Anj Medda, who is general partner at Unreason Horvitz, and Dave Blunden, founder of Exponential Ventures.

2:02We talked about the crazy-mazy valuations of AI companies, how AI startups are scaling fast and with less capital, what that means for venture funding, and where investors should place their bets in AI. I'm so excited to share this with you, so let's get to it. I'm Rana El-Khalyubi, and this is Pioneers of AI, a podcast taking you behind the scenes of the AI revolution.

2:41We have a lot to talk about, so I'm going to dive right in. So it's really clear to me that the next trillion-dollar company has to be AI. It has to be AI-driven. But what does that look like? Dave, I'll start with you. Me first? Okay, sure. The obvious ones are customer service, the AI voices, the avatars that you're seeing today. I don't know if I'll tell you all about this, but they're about to get incredibly engaging and incredibly good. And there's$10 trillion of customer service phone calls that are going to move to AI imminently. So that alone would create a trillion-dollar value company.

3:16So to get to a trillion-dollar values, you need about$300 billion of revenue, maybe$100 billion on the bottom line, a la Apple or Google. So I think out of a$200 trillion add to the economy, lots of opportunity for that. And what do you think? I don't think I have a more quantitative answer than you, but I think my mind always goes to the stack, which is you've got sort of core infrastructure, then you've got what we're seeing as the model layer, and then we've got the applications. And if you think about the last few trillion-dollar companies we've seen, NVIDIA is obviously a great example of starting at the bottom right there.

3:51And so I think you're just going to see another trillion-dollar company from multiple emerge at the next layer of the stack at the model level and then at the application level. The one I'm really excited about right now, which has come sooner than I expected, which we were talking about backstage, is the computing interface to what we call some version of a model that can take actions on your behalf, right? Agents and so on. The reality is that we're still kind of mediating all of them through smartphones or regular MacBooks and so on, like computers. I think that's actually very interesting because a smartphone is not an AI native interface, right?

4:29Right. So there's going to be an opportunity for somebody to build this AI native interface. And I think I have a point of view on that. I think if you look at the history of computing, it's basically there's these two lineages, right? You have the history of intelligence and the history of interfaces. And so often what happens is you have a breakthrough in the intelligence, and that can be something going from a mainframe to a PC. And then what happens is you have something like a terminal replaced by the GUI. And so where we are now is basically we've had this incredible breakthrough in intelligence, which is generative models, but we haven't had an interface catch up yet.

5:05And I think what I'm watching for is an interface that captures daily context about your life. Because a smartphone is basically living in your pocket most of the day. It understands just a tiny sliver. It's like drinking through a straw, right? The amount of context it has about your life is tiny. So some version of a wearable that understands, sees what you're seeing, hears what you're hearing, knows where you're focusing, has context about your life as I think where computing is going. And I think it's hard to not see a trillion-dollar opportunity there. Yeah, conversational, perceptual, and I would argue empathetic, but we'll come to that.

5:38So CB Insights published a report a few months ago showing how AI unicorns are scaling with half the team size and in a fraction of the time compared to traditional SaaS startups. I'm already seeing this in my portfolio companies. Just yesterday, we had Brandon Foody on stage. His company is a perfect example of that. So as investors, how do you think that kind of changes the calculus around scaling risk, capital efficiency? Also, you know, if companies need less capital up front, how does that shift the venture model? Yeah, well, first of all, this is by far the best era for seed stage investing I've ever seen in my life.

6:21Been doing it for 20 years. I was very fortunate to found my first company right as the Internet was taking off. and that kind of changed the course of my life. But since then, since basically 2002, nothing like this has happened until now. And you're exactly right. And I think the window to invest in this started maybe a year and a half, two years ago, the real sweet spot. And you have maybe a couple more years. And so if you don't get on those cap tables in that window of time, the next trillion dollar companies are being formed right now or were formed maybe six months to a year ago. If you're not involved in them, you're missing the window.

7:00This is it. Ansh, what's your point of view? I don't know if I have, let me put it this way. I think it changes every six months. I don't know if I have a steady state conviction yet on whether we're, what went, I have no idea what venture will look like, I think, two years from now. But I'll tell you two years or four years ago when, you know, the Anthropic guys gave me a call and said, we want to leave OpenAI and we're thinking about starting a new lab. And I said, okay, how much do you need to get started? And they said, I think we can get by with five. and I said, okay, 5 million bucks. I think we can round it up.

7:29I'll wire it next week. And Dario said, no, Anja, we need 500 million. Interesting. I said, okay, that's a little bit different. And so we then went and raised a seed round of 100 million, which is still an extraordinary amount at the time. But what that taught me is, at least for the era of businesses that you would call at the bottom of the stack sort of foundation model infrastructure businesses, they actually look more like biotech companies than they do traditional software, right? Because if you think about the shape of development there, it's a group of scientists usually de-risking core research within an industrial or academic lab.

8:03There's only a handful of talent globally who can contribute to that. It's very capital intensive, but it's winner take most. So the minute you have kind of the state of the art, right, and you put it out, you put an API behind it, suddenly the path to a billion in ARR is just overnight. It's very similar to drug development in that sense. Product companies, on the other hand, have a completely different physics. We were talking backstage about a company I helped get going two years ago called Sesame that just came out of stealth. And Sesame is a very quick show of hands. How many people have heard of the Sesame voice model?

8:36Okay, so about 10%. How many have seen the movie Her? Okay, because that's kind of basically what you guys are building, right? It's a team that the CEO is former co-founder and CEO of Oculus. So he's built hardware before. the CTO Ankit was my co-founder and CTO and led the AI platform at Discord. He understands voice really well and what they showed off last week was a research preview of this model that they think kind of starts to cross the uncanny valley in voice and what's different about them is you know they put out the voice model and it's a research preview. It's gotten millions of people using it in four days but the physics of funding that look nothing like funding of a foundation model company because it's much more of a product company where they actually leaned on open source language models the one they used is called gemma from google and that model didn't exist three four years ago so if you want to do anything interesting in product four years ago it's extraordinarily expensive today you can do that largely by using open source models and the capital required to get to your first prototype is is is extraordinarily less mid-journey in fact you know is a company that we've talked about before, they're 100 % bootstrapped and they were able to piggyback on stable diffusion, which is an open source image model.

9:51And I think that's why it's so exciting right now to be a product founder where suddenly the cost of the physics of getting to your first product had collapsed overnight. So they don't need venture. Frankly, when I see a pitch right now, which they're building up, it's a product vision. If you don't have a prototype and market, my first question is, why not? You don't need anybody's permission anymore to go just go build it, ship it, and start getting product market fit. Whereas three, four years ago, that was much harder. Yeah. I have to ask a quick question on Sesame. Most people here know that I've spent the last 20 years building artificial emotional intelligence.

10:27And I really believe that that's going to be a fundamental piece of a ubiquitous AI interface. How do you think about that at Sesame? Oof, okay. How long do we have? Quickly. The short version is they think voice is the best interface to a wearable. Their vision is a pair of everyday lightweight glasses that you just wear all day. If you think about how many people wear that interface. And I think they've realized after years and years of attempting this, that augmented reality, as we traditionally call it, which is a display-based AR, is a distraction. if you have a good enough, smart enough multimodal model that can sense the world for you, but can talk back to you via voice and you can interact with it via voice, you actually don't need a display for most of your life.

11:13Now, every now and then you'll pull out a phone and when you really do need as a companion device, but the idea is that super lightweight glasses that look and feel no different than the ones we're already used to wearing every day with no display is kind of the hardware that gets unlocked once we get really good voice multimodal companions that actually, like you said, have emotional understanding and context about your life. It's like having, if you could actually unlock the intelligence of somebody sitting on your shoulder, then you don't need the phone that much. More of my onstage conversation at Abundance Summit in a minute.

11:53Stay with us.

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13:02Like$50 million plus seed rounds with Antropic, it was even larger. Companies raising at a billion dollar valuation and more with barely any revenue. With my kind of investor hat on, it's really hard not to have FOMO, but also maintain valuation discipline. So how do you both think about these valuations and do you think they're justified? Well, they're definitely justified by the upside, but I'm not seeing$50 million seed rounds very often. Those are outliers. What's happening there is, you know, news likes to make news, and the way you make news is by talking about the really, really rare outliers.

13:36You are seeing some crazy cases like, you know, Yulia Sutever getting a crazy founding valuation. But the much more common case, you know, I teach at MIT. Ange teaches at Stanford. 80 % of the students now at MIT want to either found a company before they graduate or on graduation day. So it's a huge entrepreneurial community that wants to start companies. By and large, if it's a great team, they're super bonded, they've done a prototype, they'll get maybe a 10 to$15 million valuation, not 50. And they're not price sensitive generally, they're looking for the perfect investor to get them credibility, distribution, or the next valuation.

14:15Then you get this rapid step-up after that. And I think those rapid step-ups are justified easily, actually. If you look at the time to revenue, if you look at the TAMs, the addressable markets for these companies, they're so much bigger than anything we've seen before. So they make a lot of sense. Let's talk about the age of these founders. If you look at the heroes of the industry, the Mark Zuckerbergs or the Bill Gateses, they're all 20, 24-year-old or younger founders. So I think that trend is going to continue. Yeah, for us, the time to scale has gotten shorter and shorter and shorter. Well, also the barrier to starting a company, right?

14:54Your point about like just you can build a product with very... Yeah, I mean, I think if you're an AI aware, you know, 18, 19, 20 year old, you can more than create a phenomenal company and product, but you know very little about life. You know, there's a lot to learn about running a company. So what we do in our accelerators, we try and take on payroll, accounting, food, office space. Last week, we bought an apartment building with 24 apartments. It was paid for, I haven't even seen it yet, actually. It's a$5.5 million check. I said, yeah, write that check. Let's go buy that building. One of our portfolio companies, Mercore, reached a$2 billion valuation in under two years.

15:32So its valuation went up$20 million per week. So what I told our team is, look, if we saved two weeks for that team finding an apartment at age 20, like CEO's 21 now. If we saved them two weeks, that's$40 million of value that we've created. So let's get the building and let's go. That's crazy. Yeah. That's right. Yeah, I love it. The only thing I would add to that is I think it can be dangerous because you asked about FOMO. I've been through that. I understand that almost too well because I started my last company in the middle of the augmented reality computer vision, you know, craze of 2017, 2018, self-driving car companies were exploding.

16:13The amount you'd have to, you know, researcher salaries were exploding. There were all these crazy arms races for people, you know, getting 30,$40 million salary packages from, you know, Waymo and so on. And I was busy trying to build as a founder, you know, a small and scrappy team to do computer vision work. And I was like, I had all these higher and higher valuations. And if I look back now, basically nine out of the 10 companies that had all these crazy valuations from SoftBank and blah, blah, blah, have basically died and exploded, you know? And I think it's very easy to fall into the popularity contest of valuations, which really don't mean very much in private equity land or private stock land.

16:53And I think what is really, what has changed is that the time to build a real business, like the time to your first 10 million in revenue and real customer value has never been, I've never seen this many companies get to that so fast. We're investors in this company called Cursor, which is another MIT team. And they're just, you know, a year or two out of school. And they didn't raise hundreds of millions of dollars at some crazy valuation. I think their seed round was like$5 million. They shacked up in a house in San Francisco. Not quite Dave's apartment, but like, yeah. They can help them with their mansion for their next company.

17:29But, you know, this one, they got basically a small house in North Beach in SF and just locked themselves in a room and focused on shipping a product people love to use. And they just crossed$100 million in revenue in eight months. No sales team, less than 20 people. The valuation is, I think, a distraction. But I think it's worth asking. the, you know, valuations are sort of lagging indicators. What comes first is product market fit. And the time to that, I think, has never been faster. Yeah. I'm a little biased because I started my company out of MIT where I was a postdoc. But Dave, you believe strongly that MIT is the AI startup capital.

18:04I believe very strongly in the ecosystems. And there's a great Paul Graham quote that the difference between being a startup founder and unemployed is just a question of interpretation. So if you're in a community of other people doing startups, but you see the ecosystem effect, regardless of schools, you see the ecosystem effect all over the place where any dense, like-minded community of people working on things, they share ideas at an incredible rate, but they also reinforce each other. They give confidence to each other. And they also share leads to investors, to sales, to whatever. And that effect is unbelievable as a force multiplier.

18:45So I guarantee it has nothing to do with the talent at the other universities. It has to do with the fact that you've got a high concentration of people trying to build companies in a very tight area. Cambridge, in particular, it's the densest innovation cluster in the world by far. Silicon Valley has more volume, but it's more spread out. but Kendall Square in Cambridge, you've got MIT, Harvard and then there are 200 other schools and most of those you could walk to and so it's just an incredible density of talent in a very small area so that's what's causing those numbers to go up We're going to take a short break More in a minute

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20:41You know, it just gave us that runway to be able to breathe a little bit. Then you get to focus on the cooking of the food and making the experience great. To learn more, go to CapitalOne.com slash business cards. So the theme of this year is convergence and how AI is unlocking value in all these other disruptive industries as well. And I'll share an example. One of the companies I'm investing in is called Labyrinth. They are anchored by Invisible. So Francis is here, Stuart Lacey, I don't know where you are, but hi. And they're officially launching at Abundance. And they're on a mission to accelerate companies through the regulatory process.

21:20And that is just going to create tons of value in industries, you know, drug discovery, medical devices, autonomous vehicles, drones, nuclear energy. And they're doing this with AI, right, and human expertise. So as a result, I actually now feel comfortable looking at industries that are traditionally very heavily regulated because I think, you know, if they can get to market faster, that de-risks it. And in fact, you know, there's a lot of significant upside. So as investors, where do you think the value is in this AI landscape? And what is AI unlocking? What industries are you most excited about?

22:00What industries? God, there's so many that are touched by this. But I think in my little intro there, I started a fintech company many years ago called Vestmark. We manage a little under$2 trillion of assets. And it's regulated. It's an RIA. And they're loving this AI revolution because the little startups have a real hard time dealing with a regulated area and they're trying to deal with the SEC. So they have to come through Vestmark. So as long as Vestmark is nimble enough to keep up with it, then that's the channel by which AI gets out to the RIA world. But that gets me thinking about regulated areas in general.

22:34Like the hyper-regulated areas like the FDA are very tough, and it slows down time to market, which is kind of tragic. The semi-regulated areas like TCPA phone calls, being an appointed insurance agent, those are really nice barriers to entry. There's a little bit of friction, but it's enough to keep open AI from just doing it tomorrow. So I love those as investment things. How about you? Where do you see the value in kind of the AI space? I don't know that AI has changed really that much where the value accrues. And that there's a constant question, which everyone's always asking, which is what's the moat?

23:07And there's going to be my next question. So where is the moat? I just don't think there is a misnomer that AI models are somehow moats. They're not. They give you head starts. They give you advantages. But the fundamental sort of, I'm a big believer in, you know, the seven forces of value and power and moat and so on. And I think. Go through them. It's all the classic stuff, right? It's network effect and it's brand and it's sales. And you're talking about regulatory barrier. Like those fundamentals of business, I don't think have changed. Usually once or twice a decade, a new technology comes along that gives startups a fundamental speed and head start advantage over incumbents.

23:45But then ultimately, they've got to build out real value in the traditional sense. And I think teams that are accruing the most value are the ones that realize that models are not some steady state mode. They just give you a head start. The number one, I kind of think of models as cold fusion almost. When you have cold fusion, you don't need to sell it. It's the closest thing we have to build it and they will come top of funnel driver because they're so magical general models when you just put them up, especially with state-of-the-art. So if you're a team that confuses the value between models and solutions, you're going to end up in trouble.

24:20But if you realize that models are not solutions, models are inputs to a solution and that customers don't want models. They want some product, some platform. They want you to solve their problem. The faster you do it with a model and then realize that that's just a head start, you know, the easier. Yeah, I tell founders if, you know, they wake up every day and they're worried that the next version of chat GPT is going to put their business out of, you know, they put them out of business, then I don't want to be an investor in that company, right? However, if the next version of these foundation models makes your product and your solution better, then that's defensible, right?

24:57Yeah, in a sense, I think OpenAI is struggling or rather has been grappling with this where they realize that distribution is what matters. So distribution is a source of value. That's why they've taken a really great and aggressive stance towards trying to get chat gpt to be a consumer brand and product yeah and today it's like what you know top 10 consumer destination which was not by the way the founding premise of the company right the founding premise was we're going to build agi get put you know put out open research and then maybe put an api up and hope the world will figure out what products to build and they've they've clearly at least for three years now been methodically investing in building a real fraud a distribution uh sort of advantage i i think that's because they've realized just having the top leaderboard model doesn't grant them a license to win either.