Exploring the Value of AI: Startups vs. Incumbents and Building a Digital Legacy

Sep 01, 2023

4 min read

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Introduction:

AI has been a transformative force in various industries, and its impact on startups and incumbents has been a subject of interest. In previous waves of technological advancements, incumbents tended to capture a significant portion of the value, leaving startups with a smaller share. However, the landscape seems to be shifting in the current wave of AI innovation. This article delves into the dynamics between startups and incumbents in the context of AI, as well as the concept of building a digital legacy.

The Shift in Value Distribution:

In the early days of the internet, startups like Google, Amazon, and Facebook emerged as the primary beneficiaries, capturing the majority of the value. Incumbents such as Microsoft and Apple also secured a portion of the value by extending their existing franchises onto the internet. The split between startups and incumbents in this wave was roughly 60:40 or 70:30.

In the mobile era, incumbents like Apple and Google dominated, leveraging their existing market presence and creating mobile versions of their applications. However, startups like WhatsApp, Uber, and Instagram also managed to capture a significant share of the value. The split in this wave skewed more towards incumbents, with a ratio of approximately 20:80.

Crypto, on the other hand, witnessed almost exclusively startup capture of value. Bitcoin, Ethereum, and other cryptocurrency startups emerged as the key players, with minimal participation from existing financial services or infrastructure companies.

Overcoming Incumbent Advantages:

To compete with incumbents successfully, startups generally need to offer a product that is dramatically superior, overcoming the distribution, capital, and pre-existing product moats of incumbents. They may also focus on untapped customer segments or distribution moats that incumbents cannot serve. In essence, a 10X better product is often required to disrupt incumbents effectively.

However, the advantage that incumbents have enjoyed could be diminishing. Startups are now leveraging the broader internet as an initial training set, and models that can work robustly with smaller datasets are becoming more prevalent. This leveling of the playing field may contribute to startups having a larger share of AI-generated value.