Tech differentiation doesn't exist.
GenAI, the likelihood of 100x returns and a buyers market for corporates
GenAI can’t deliver venture style returns
The best product-market-fit for these companies
A question for all the PEs / VCs and CFs who receive Tikto Tidbits
We read a good article from Nfx (interesting fund, frequently thought provoking content) the other day: AI is Like Water. Here’s a 3.5 line summary:
Core AI technology is owned by incumbents. Their data + model is better than your data + model. They have far superior distribution
All companies in the AI application layer are a wrapper around the same core technology
Therefore, if you’re a GenAI startup, your route to outsized success is User Experience (UX) or the ‘perceived value’ of your product to users
The water analogy from the article title focuses on perceived value and how companies like Perrier in the 1970s and Liquid Death of late have managed to create this despite the substance within the bottle/can/wrapper being an undifferentiated core product (water).
In a way the article is a depressing read. If you want to be an AI investor in venture-land it encourages you to look for businesses with a brand/PR/marketing edge (perceived value) and/or a fun (albeit ultimately reproducible) product experience. That’s all very B2C: the land of poor economics and a graveyard of both businesses and capital.
We’re being overly dramatic and, of course, there are plenty of areas where VCs may find a happier hunting ground for their 100x return beyond GenAI: MedTech and TechBio, Industrial Technology, moon shots (quantum computing, space, crypto), etc. These are all markets where the incumbents are often not “proper” tech businesses and so there remains good disruptive potential.
Nonetheless all this has us thinking: if, because someone else owns the means-of-production, GenAI wrappers aren’t likely to be the golden goose for venture capital what happens to all those businesses? Should they exist at all? What happens to all of those companies when the VC juice runs out?
First off, it’s not that strong demand does not exist for these GenAI wrappers.
We often think that a highly related market here (for B2B use cases) is the process automation market. The promise of GenAI apps is to be your co-pilot: to descope yesterday’s workload so that one can focus on the work of the future. That’s a whole lot like process automation and there’s nothing wrong with that market.
The process automation market is very Enterprise however. It’s driven by big businesses doing big ‘change’ projects overseen by many, many consultants. GenAI promises to be more of a one-stop-shop however. In our mind that makes it a perfect fit for the corporate mid-market and SMEs.
These corporates rarely have significant procurement teams and processes (if at all) but have plenty of growing pains in the form of operational and technical debt. They would happily address these problems given that a trustworthy, effectual, and unified solution came knocking. It isn’t a market where it’s possible to grow like stink (so again, ill suited for VC) but there is plenty of unsatisfied demand.
The problem here is that the GenAI wrappers are point solutions - like JasperAI, the poster child for “venture returns will be hard to come by as a wrapper - and so something needs to be done to stitch it all together. This is clearly a buy-and-build, PE-style opportunity.
There are (literally) hundreds of each venture capitalists, entrepreneurs, corporate financiers and PE professionals who receive Tikto Tidbits: if any of you have some thoughts on this and why we don’t see more M&A, specially buy-and-builds, in this space we’d love to ear them. Needless to say, it’s an opportunity that we at Tikto are closely looking at.
Tikto
At Tikto, we purchase stakes in EBITDA profitable businesses or tech businesses with challenged business models and follow that up with incremental growth capital. We bring our network of experienced operators to help execute a business plan for the next phase of our portfolio companies’ growth.
Get in touch: hello@tiktocapital.com