The Changing Landscape of AI: Startups and Incumbents

The Changing Landscape of AI: Startups and Incumbents

Introduction:

In the ever-evolving world of technology, AI has emerged as a game-changer. However, when it comes to the distribution of value generated by AI, there has been a noticeable shift from startups to incumbents. This article explores the historical patterns of value capture in different technological waves and delves into the reasons behind the changing landscape of AI. Additionally, it discusses the potential for startups to gain a larger share of AI-generated value in the current wave, as well as the importance of identifying actual end-user needs.

The Evolution of Value Capture:

Looking back at the first internet wave, the majority of the value went to startups such as Google, Amazon, and Facebook. Incumbents like Microsoft and Apple also managed to extend their franchises onto the internet and capture a significant portion of the value. This resulted in a relatively balanced split between startups and incumbents, with a ratio of approximately 60:40 or 70:30.

In the mobile era, however, incumbents like Apple and Google dominated the value capture, with startups like WhatsApp and Uber making notable contributions. The split between startups and incumbents in this wave was skewed heavily in favor of the latter, with a ratio of approximately 20:80.

Crypto, on the other hand, witnessed almost complete startup capture of value. Bitcoin, Ethereum, and other cryptocurrencies emerged as disruptive forces, with existing financial services and infrastructure companies playing a minimal role in value creation.

The Rise of AI:

The emergence of AI brought about a new wave of innovation, with several "AI-first" companies leading the charge. However, the truly significant AI applications landed in the hands of incumbents such as Google, Facebook, and Amazon. To overcome the distribution, capital, and product moats of incumbents, startups typically need to build something that is at least 10 times better or target a new customer segment or distribution moat that incumbents cannot serve.

One possible reason for incumbents' success in AI is their data advantage, which is gradually diminishing as companies leverage the broader internet as a training set and adopt models that work effectively with smaller data sets. Additionally, the current wave of AI is characterized by a remarkable speed of innovation across multiple areas, making it easier for startups to create products that are 10 times better than existing offerings.

The Role of Infrastructure-Centric Companies:

Unlike previous AI waves, the current wave features a prominent presence of infrastructure-centric companies that have gained broad adoption and rapidly growing usage. OpenAI, Stability.AI, Hugging Face, Weights and Biases, and others are leading the charge, providing startups with access to crucial technologies and creating a fertile ecosystem for new ventures.

Actionable Advice:

1. Focus on Actual End-User Needs: To succeed in the AI landscape, startups must identify and address the genuine needs of end-users. By understanding the pain points and unmet demands, startups can develop products that truly resonate with their target audience.

2. Leverage AI as a Core Workflow Tool: AI excels in highly repetitive tasks like coding, generating marketing copy, and creating website images. Startups should explore the integration of AI features into broader workflow tools, enhancing productivity and efficiency.

3. Avoid the Hammer-Looking-for-a-Nail Problem: While the advancements in AI technology are exciting, it is crucial to avoid the trap of developing solutions without clear market demand. Startups must prioritize finding unserved product/markets that can genuinely benefit from the current wave of AI technology.

Conclusion:

As AI continues to reshape industries and transform the technological landscape, startups are poised to gain a larger share of AI-generated value. With the advent of infrastructure-centric companies and the rapid pace of innovation, startups have the opportunity to build products that surpass incumbents' offerings. By focusing on end-user needs, leveraging AI as a core workflow tool, and identifying untapped markets, startups can thrive in the evolving AI landscape. Exciting times lie ahead for those who embrace the potential of AI and navigate the changing tides of technological disruption.