As the hype around Artificial Intelligence (AI) continues to grow, venture capitalists are faced with a critical decision: how to navigate this new and rapidly evolving landscape. While some investors are jumping headfirst into the market, others are taking a more cautious approach, unsure of where to place their bets.
The Cautionary Approach
Charles Hudson, co-founder of Precursor Ventures, is one such investor who is exercising caution in his AI investments. Despite being at an AI confab last month, Hudson has yet to make a new investment in the space during the current hype cycle. He acknowledges that he’s seen this movie before – the inflection point, the influx of capital, and the sometimes hasty deals.
"I was okay with being almost zero on crypto," Hudson said, "but I don’t think I’m okay with zero as the answer for AI. The question is where and how."
The "ChatGPT for X" Phenomenon
One area where Hudson is hesitant to invest is in the "ChatGPT for X" companies – startups that are essentially wrapper companies stitching together pre-existing technologies. He believes these companies lack innovation, and his imagination hasn’t provided an answer as to how they can differentiate themselves.
"I might regret that," Hudson said, "but I think I would just say, my imagination didn’t provide the answer."
The Portfolio Approach
Jason Lemkin, founder of SaaStr, also has reservations about investing in pure-play AI startups. He believes there’s no rush to invest and instead focuses on adding an AI component to his existing portfolio companies.
"I’m not sure there is a rush, but I could be wrong," Lemkin said.
The Late-Stage Investor’s Perspective
Cathy Gao, partner at Sapphire Ventures, takes a more patient approach. As a late-stage investor, she has the luxury of time to make informed decisions about her investments.
"It’s all about getting a lay of the land in terms of all the different companies," Gao said, "waiting and seeing which ones pop. Is it going to be one company taking all or a long-tail of companies that accrue value?"
The Defensibility Conundrum
For investors like Hudson and Lemkin, the uncertainty surrounding defensibility adds an extra layer of due diligence to their investment decisions. In the early stages of company building, it can be challenging to prove the uniqueness and sustainability of a particular technology or business model.
A Watershed Moment for AI Investments
Navin Chaddha, managing director at Mayfield Fund, sees the current hype cycle as a watershed moment for AI investments. With around 30 investments in the space over the last seven years, Chaddha believes it’s time to double down on this promising area.
"We’re seeing a lot of innovation happening in the space," Chaddha said. "We’re excited about the potential for companies to scale and create value."
New Entrants to the Market
The current AI hype cycle has also attracted new entrants to the market, including OpenAI’s latest developments. While these innovations are promising, they also raise concerns about the pace of innovation and the competition in this space.
Conclusion
As the AI investment landscape continues to evolve, venture capitalists must navigate complex decisions around defensibility, innovation, and scalability. Whether it’s a cautious approach or a more aggressive one, investors will need to stay informed and adaptable in order to succeed in this rapidly changing environment.