"AI: Startup Vs Incumbent Value - The Changing Landscape and Opportunities"

"AI: Startup Vs Incumbent Value - The Changing Landscape and Opportunities"

Introduction:
The value generated by AI has historically favored incumbents over startups. However, as technology advances and new opportunities arise, there is reason to believe that startups will play a bigger role in capturing the value created by AI. In this article, we will explore the dynamics between AI startups and incumbents in different waves of technology, the importance of building 10X better products, the role of infrastructure-centric companies, and the need to address actual end-user needs.

The Dynamics of Previous Technology Waves:
In the first wave of the internet, startups like Google, Amazon, and Facebook captured a significant portion of the value, while incumbents such as Microsoft and IBM extended their franchises onto the internet. The split was roughly 60:40 or 70:30 in favor of startups. However, in the mobile wave, the value mostly went to incumbents like Apple and Google, with startups like WhatsApp and Uber also making significant gains. The split in this case was around 20:80. Interestingly, the crypto wave has seen almost 100% startup capture, with companies like Bitcoin and Coinbase leading the way.

Challenges in Beating Incumbents:
To overcome the advantages of incumbents, startups usually need to build products that are dramatically better, focus on untapped customer segments, or develop distribution moats that incumbents cannot serve. A 10X better product is often a requirement for success. However, incumbents may have had an advantage in the past due to their data advantage, which is diminishing as companies leverage the broader internet as a training set and adopt models that work better with smaller data sets.

The Changing Landscape of AI:
While many prior-wave AI companies directly took on incumbents or operated in hard markets, the current wave of AI feels different for a few reasons. The speed of innovation across various areas is remarkable, making it easier to create products that are 10X better than what incumbents offer. Although GPT-3, a highly advanced AI model, has not yet led to a surge in startups building big businesses, a model that is 5-10X better could create a new ecosystem for startups while augmenting incumbent products.

The Role of Infrastructure-Centric Companies:
Unlike previous AI startups, the current landscape includes a clear set of infrastructure-centric companies that are rapidly gaining adoption. These companies, such as OpenAI, Stability.AI, Hugging Face, and Weights and Biases, provide the necessary tools and technologies for startups to leverage AI effectively. This ecosystem creates more opportunities for startups to thrive and succeed.

Identifying Actual End-User Needs:
The key to success in this wave of AI is to avoid the "hammer-looking-for-a-nail" problem. It is crucial to identify actual end-user needs and unserved product markets that can benefit from the advancements in AI. By focusing on delivering superior value to the market, startups can position themselves for success and capture a significant share of the AI-generated value.

Actionable Advice:

1. Build a 10X better product: To compete with incumbents, startups must focus on creating products that are significantly superior in terms of features, performance, or user experience.

2. Leverage infrastructure-centric companies: Take advantage of the tools and technologies provided by infrastructure-centric companies to accelerate the development and deployment of AI-powered products.

3. Address actual end-user needs: Conduct thorough market research and identify unserved product markets that can benefit from AI. Tailor your product to meet the specific needs of your target audience.

Conclusion:
After years of incumbents dominating the value generated by AI, the current wave of technology presents an opportunity for startups to capture a larger share. With advancements in AI, the availability of infrastructure-centric companies, and a focus on addressing actual end-user needs, startups can finally start to realize the true value of AI. Exciting times lie ahead for those who can effectively navigate this changing landscape and build products that truly make a difference.