AI: Startup Vs Incumbent Value - The Changing Landscape

AI: Startup Vs Incumbent Value - The Changing Landscape

In the world of technology and innovation, there has always been a race between startups and incumbents to capture the value created by new waves of technology. AI, or artificial intelligence, is no exception to this trend. However, what is interesting to note is that the prior wave of value from AI seemed to predominantly go to incumbents, despite significant startup activity in the field. This is in stark contrast to previous waves of technology, such as the internet and mobile, where startups were able to capture a larger share of the value.

If we look back at the first internet wave, we can see that most of the value went to startups like Google, Amazon, Paypal, Ebay, Salesforce, Facebook, and Netflix. However, there were also incumbents like Microsoft, Apple, IBM, Oracle, and Adobe who were able to extend their franchises onto the internet and capture a portion of the value. This resulted in a split of roughly 60:40 or 70:30 between startups and incumbents.

The mobile wave, on the other hand, saw most of the value going to incumbents like Apple and Google, with every mobile version of an incumbent's app gaining significant traction. However, startups like Whatsapp, Uber, Doordash, Instagram, and Instacart were able to carve out their own market share. In this case, the split was more skewed towards incumbents, with a ratio of around 20:80 between startups and incumbents.

Crypto, however, has been a different story altogether. It has seen almost 100% startup capture of value creation, with companies like Bitcoin, Ethereum, Coinbase, Binance, and FTX leading the way. Existing financial services or infrastructure companies have had limited participation in this space. This raises the question of why incumbents have been able to dominate in some waves of technology while startups have succeeded in others.

To beat an incumbent as a startup in the AI space, you usually need to build something that is dramatically better, overcoming the distribution, capital, and pre-existing product moats of the incumbent. Alternatively, you can focus on a brand new customer segment or distribution moat that the incumbent cannot serve. In general, a 10X better product is required to disrupt the market. It is possible that incumbents have had an advantage due to their data advantage, which is now diminishing as companies use the broader internet as an initial training set and switch to models that work more robustly with smaller data sets.

Many AI companies in the prior wave took on incumbents directly or operated in hard markets like education or healthcare, where innovation is often stifled by market structure, regulation, or a lack of understanding of end-user needs. However, this time around, things feel different. There are several reasons for this shift.

Firstly, there has been a dramatic improvement in the technology itself. The current wave of AI is significantly stronger, making it easier for startups to create products that are 10X better than what incumbents offer. This could be the underlying reason for the changing landscape.

Secondly, there is a new set of infrastructure-centric companies that have gained broad adoption and rapidly growing usage. Examples of such companies include OpenAI, Stability.AI, Hugging Face, Weights and Biases, and others. These companies provide startups with access to the necessary tools and technologies, creating more opportunities for innovation.

Thirdly, there are highly repetitive, highly paid tasks that can be automated using AI. However, workflow tools for these use cases either do not exist or are weak. This opens up possibilities for startups to develop AI features that become a core and useful part of a broader workflow tool.

One key factor that startups need to keep in mind is to avoid the "hammer-looking-for-a-nail" problem. While there is exciting technology available, it is important to identify actual end-user needs and unserved product/markets that will benefit from this wave of innovation. This customer-centric approach will be crucial in creating sustainable value.

In conclusion, after years of AI-related work and investment, it finally feels like startups are poised to capture a larger share of the value created by AI. The speed of innovation, the improved technology, and the presence of infrastructure-centric companies all contribute to this shift. However, it is essential for startups to focus on real end-user needs and to create products that are significantly better than what incumbents offer. By doing so, they can position themselves as key players in this exciting era of AI innovation.

Actionable Advice:

• 1. Build a product that is 10X better than what incumbents offer. Focus on overcoming their distribution, capital, and pre-existing product moats.

• 2. Identify unserved markets or customer segments that incumbents cannot effectively serve. This will give you a competitive edge.

• 3. Prioritize actual end-user needs. Understand their pain points and develop products that address those needs. By doing so, you can create sustainable value and differentiate yourself from the competition.