"The Value of AI: Startups vs Incumbents and the Hard Thing About Communities"

"The Value of AI: Startups vs Incumbents and the Hard Thing About Communities"

In the world of technology, the distribution of value from AI has been an interesting phenomenon. In the past, the majority of value from technological advancements went to startups, but when it comes to AI, the story has been quite different. Surprisingly, incumbents have captured most of the value, despite the significant activity in the startup space. This has raised questions about why this shift has occurred and what it means for the future of AI.

Looking back at the first wave of the internet, startups like Google, Amazon, Paypal, Ebay, Salesforce, Facebook, and Netflix were the major winners. However, some value was also captured by incumbents such as Microsoft, Apple, IBM, Oracle, and Adobe, who extended their franchises onto the internet. This resulted in a split of around 60:40 or 70:30 in favor of startups. When it came to mobile, though, the value went mostly to incumbents like Apple and Google, with every mobile version of an incumbent's app gaining significant traction. Startups like Whatsapp, Uber, Doordash, Instagram, and Instacart did manage to capture some value, but the split was more skewed towards incumbents, around 20:80.

In the world of crypto, however, the story has been completely different. Startups have dominated the space, with companies like Bitcoin, Ethereum, Coinbase, Binance, and FTX leading the way. Existing financial services or infrastructure companies have had little participation in creating value in the crypto space. This highlights the unique nature of crypto and its potential for disruption.

To beat an incumbent as a startup in any industry, you either need to build something dramatically better that overcomes the incumbents' advantages, or you need to focus on a brand new customer segment or distribution moat that the incumbent cannot serve. In general, a 10X better product is required to succeed. However, incumbents may have won in the past due to a data advantage that is now diminishing as companies utilize the broader internet as an initial training set and switch to models that work robustly with smaller data sets.

Many prior-wave AI companies either directly challenged incumbents or operated in hard markets such as education or healthcare. These markets are often resistant to technological innovation due to market structure, regulation, or a lack of understanding of end-user needs. However, this time feels different for AI. The speed of innovation across various areas is remarkable, and the technology seems dramatically stronger. This means that startups have a better chance of creating 10X better products to overcome incumbent advantages.

While GPT-3, a popular AI model, has shown promise, it has not yet sparked a wave of startups building big businesses on it. However, a model that is 5-10X better than GPT-3 could create a whole new startup ecosystem while also augmenting incumbent products. Additionally, there are now clear infrastructure-centric companies with broad adoption and rapidly growing usage, such as OpenAI, Stability.AI, Hugging Face, Weights and Biases, and others. This provides startups with more opportunities and access to the technologies needed to succeed.

Furthermore, there are specific use cases where AI can bring significant value. Highly repetitive, highly paid tasks like coding, marketing copy, and website images can benefit from AI-powered workflow tools. The ability to summarize or generate text and images in a high-fidelity way opens up new possibilities for product applications. However, it is crucial to avoid falling into the trap of using AI as a solution in search of a problem. Identifying actual end-user needs and unserved markets that will truly benefit from AI technology is key.

Shifting gears, let's explore the hard thing about building communities. Communities thrive because of their contributors, and people only contribute if they trust that their time and energy will be put to good use. Trust is the foundation of successful communities, and it is built upon several factors. Contributors need to trust that their contributions will be utilized effectively, that the intentions of the community are genuine, that progress can be made towards shared goals, and that the values of the community align with their own.

Communities become real when they achieve their first win. Enthusiasm alone is not enough to sustain a community. It is essential to clearly define the purpose of the community and how it will help individuals achieve their goals. By empowering community members to have influence and impact, you demonstrate that their goals and aspirations matter. Real trust is formed when the interests of others are prioritized over personal gain.

Unfortunately, even smart and talented individuals can struggle to build successful communities. Unrealistic expectations of the process, trying to imitate existing communities, and prioritizing superficial aspects over creating value are common pitfalls. Building a thriving community requires a deep understanding of the needs and desires of the community members, and a genuine commitment to delivering value and fostering trust.

In conclusion, the value distribution from AI has shifted towards incumbents, but there are signs that startups may have a greater share in the future. The advancements in AI technology make it easier to create 10X better products that can overcome incumbent advantages. However, it is important to identify actual end-user needs and unserved markets to truly capitalize on the potential of AI. Similarly, building successful communities requires trust, genuine intentions, and a focus on creating value for community members. By understanding these dynamics, startups and community builders can navigate the challenges and seize the opportunities presented by AI and community building.

Actionable Advice:

1. Focus on creating a 10X better product: To compete with incumbents, startups need to offer a product that is significantly superior. Invest in research and development to leverage the latest AI technology and create innovative solutions that provide substantial value to customers.

2. Identify unserved markets and end-user needs: Avoid falling into the trap of using AI as a solution in search of a problem. Conduct thorough market research and identify specific customer segments or untapped markets that can benefit from AI-powered products. Address their needs and pain points to gain a competitive edge.

3. Foster trust and prioritize community needs: When building a community, prioritize the interests and goals of community members over personal gain. Empower individuals to contribute and have a real impact on the community's direction. Nurture trust by delivering value, maintaining transparency, and fostering a sense of belonging.

Exciting times lie ahead for startups in the AI space, and for community builders who understand the importance of trust and value creation. By leveraging the advancements in AI technology and focusing on the needs of customers and community members, startups and community builders can carve out their own success in the ever-evolving landscape of technology and human connection.