AI: Startup Vs Incumbent Value - A Comparison across Different Technological Waves

AI: Startup Vs Incumbent Value - A Comparison across Different Technological Waves

Introduction:
The distribution of value generated by AI has varied across different technological waves. In the initial wave of the internet, startups like Google, Amazon, and Facebook captured a significant portion of the value, while incumbents like Microsoft and IBM also extended their franchises onto the internet. However, in the mobile wave, incumbents like Apple and Google dominated, with a smaller share going to startups like WhatsApp and Uber. Interestingly, the crypto wave witnessed almost complete startup capture, with very little participation from existing financial services companies. In this article, we will explore the reasons behind this disparity and examine the potential for startups to capture a larger share of AI-generated value in the current wave.

Overcoming Incumbent Advantages:
To succeed against incumbents, startups need to either build a product that is significantly better than what incumbents offer or target a new customer segment or distribution moat that incumbents cannot serve. In general, a 10x better product is required to overcome the distribution, capital, and pre-existing product moats of incumbents. However, the advantage of incumbents may be diminishing as companies utilize the broader internet as an initial training set and switch to models that work more effectively with smaller data sets.

The Current Wave of AI Startups:
Unlike previous waves, the current wave of AI startups is characterized by a stronger technological foundation, making it easier to create products that are significantly better than incumbent offerings. Although GPT-3, for example, is not yet widely used by startups to build big businesses, a 5-10x better model could create a new startup ecosystem while augmenting incumbent products. Additionally, there are now infrastructure-centric companies with broad adoption and rapidly growing usage, providing startups with access to essential technologies and creating more opportunities within the ecosystem.

Identifying Unserved Markets and End-User Needs:
To leverage the potential of AI in this wave, it is crucial for startups to focus on identifying actual end-user needs and unserved product markets that can benefit from this technology. Rather than just being a hammer looking for a nail, startups should prioritize understanding the pain points of their target customers and developing solutions that address those needs effectively. By aligning technology with actual end-user requirements, startups can maximize the value they generate from AI.

Actionable Advice for AI Startups:

1. Focus on the actual end users' needs: Prioritize understanding the pain points and requirements of your target customers to build products that truly address their needs.
2. Embrace infrastructure-centric companies: Take advantage of companies that provide essential AI technologies and resources to augment your products and enhance your competitive advantage.
3. Identify and target unserved markets: Look for markets where incumbents have not adequately addressed customer needs or where new distribution moats can be established, giving startups the opportunity to capture a larger share of the value.

Conclusion:
After years of incumbents capturing most of the value from AI, the current wave presents an opportunity for startups to gain a larger share. With advancements in AI technology and the availability of infrastructure-centric companies, startups have the potential to create products that significantly outperform incumbents. By focusing on unserved markets, understanding end-user needs, and leveraging the power of AI, startups can position themselves to thrive in the evolving landscape of AI-generated value. Exciting times lie ahead for AI startups!