The Changing Landscape of AI: Startups vs. Incumbents

The Changing Landscape of AI: Startups vs. Incumbents

Introduction:
The distribution of value generated by AI has shifted over time, with incumbents capturing the majority of the value in previous waves. However, there are indications that startups might have a larger share of AI-generated value in the current wave. This article explores the dynamics between startups and incumbents in various technological waves, examines the potential factors behind this shift, and highlights the importance of identifying actual end-user needs in leveraging AI technologies.

Startup Success in Previous Technological Waves:
In the early days of the internet, startups like Google, Amazon, PayPal, and Facebook emerged as dominant players, capturing a significant portion of the value. Incumbents such as Microsoft, Apple, IBM, and Oracle also extended their franchises onto the internet, securing a share of the pie. The split between startups and incumbents in this wave was roughly 60:40 or 70:30 in favor of startups.

The Rise of Mobile and Incumbent Dominance:
When mobile technology gained prominence, incumbents like Apple and Google took the lead, with every mobile version of their apps becoming the go-to choice for users. Startups like WhatsApp, Uber, and Instagram managed to carve out their own space, but the split between startups and incumbents was heavily skewed towards incumbents, with a ratio of approximately 20:80.

Crypto: A Startup-Driven Wave:
In contrast to previous waves, the emergence of crypto saw startups capturing nearly 100% of the value creation, with Bitcoin, Ethereum, and Coinbase leading the way. Existing financial services and infrastructure companies had minimal participation in this wave. The unique nature of crypto allowed startups to thrive without the interference of incumbents.

AI: Incumbent Advantage:
AI-first companies emerged in the past decade, with giants like Google, Facebook, TikTok, Netflix, and Amazon successfully leveraging AI applications. To overcome incumbent advantages, startups must either build a significantly better product or target a brand new customer segment or distribution moat that incumbents cannot serve. In general, a 10X better product is required to compete.

Factors Behind the Changing Landscape:
One potential reason for incumbents' success is their data advantage, which might be diminishing as companies utilize the broader internet as an initial training set. Additionally, the shift towards models that perform robustly with smaller data sets could level the playing field for startups. The rise of infrastructure-centric companies, with broad adoption and growing usage, also presents opportunities for startups to access AI technologies.