AI: Startup Vs Incumbent Value - The Changing Landscape

AI: Startup Vs Incumbent Value - The Changing Landscape

In the world of technology and innovation, the distribution of value between startups and incumbents has always been a topic of interest. Over the years, we've seen different waves of technological advancements, each with its own dynamics and outcomes. When it comes to AI, the distribution of value has been quite surprising.

Looking back at the first internet wave, we can see that the majority of the value went to startups. Companies like Google, Amazon, Paypal, and Facebook emerged as leaders, disrupting traditional industries and capturing significant market share. Incumbents like Microsoft, Apple, IBM, and Oracle were also able to extend their franchises onto the internet and capture a portion of the value. The split was roughly 60:40 or 70:30 in favor of startups.

The mobile revolution brought a different dynamic. Incumbents like Apple and Google dominated the market, with their apps becoming the go-to choices for users. Startups like Whatsapp, Uber, and Instagram were able to carve out their own niches, but the split was more skewed towards incumbents, with a ratio of around 20:80.

However, when it comes to crypto, the picture changes completely. The value created in this space has been almost entirely captured by startups. Bitcoin, Ethereum, Coinbase, and Binance are just a few examples of the startups that have revolutionized the financial industry and created significant value.

So, what is the reason behind this shift in value distribution? One possible explanation is the data advantage that incumbents had in the past. They had access to vast amounts of user data, which allowed them to train their AI models and create better products. However, with the rise of the internet and the availability of large datasets, startups now have the opportunity to level the playing field and create products that can compete with incumbents.

To beat an incumbent as a startup, you need to either build something dramatically better or focus on a new customer segment or distribution moat that the incumbent cannot serve. In other words, you need a 10X better product. This has always been a challenge for startups, but with the advancements in AI technology, it has become more achievable.

The current wave of AI innovation is different from previous ones for several reasons. Firstly, the speed of innovation across different areas is unprecedented. The technology has become dramatically stronger, making it easier to create products that can overcome incumbent advantages. Secondly, there are now infrastructure-centric companies that provide startups with access to AI technologies and resources, enabling them to compete on a level playing field.

Moreover, there are specific use cases where AI can make a significant impact. Tasks that are highly repetitive and highly paid, such as coding, marketing copy, and image generation, can benefit greatly from AI-powered workflow tools. Startups that focus on these areas and provide specialized solutions have the potential to create substantial value.

However, it's important for startups to avoid the "hammer-looking-for-a-nail" problem. Instead of building AI products for the sake of it, they should identify actual end user needs and unserved markets. By focusing on the customer and delivering products that address their pain points, startups can create value and differentiate themselves from incumbents.

In conclusion, the landscape of AI value distribution is changing. Startups now have the opportunity to capture a larger share of the value created by AI technologies. With advancements in AI technology, access to infrastructure-centric companies, and a focus on customer needs, startups can finally start to realize the true value of AI.

Actionable advice:

1. Build a 10X better product: To beat an incumbent, you need to create something that is significantly better than what they offer. Focus on innovation and delivering a product that addresses the pain points of your target customers.

2. Leverage AI-powered workflow tools: Identify highly repetitive and highly paid tasks in your market and develop AI-powered workflow tools that can streamline these processes. This will not only create value but also differentiate your product from competitors.

3. Focus on customer needs: Instead of building AI products for the sake of it, take the time to understand the needs of your target customers. By delivering products that solve their problems and improve their workflows, you can create real value and establish a strong position in the market.

The future of AI is promising for startups. By embracing the technology, understanding the market, and delivering innovative solutions, startups can finally start to realize the true value of AI. Exciting times lie ahead!