Venture capital is about disrupting established business models, but lately it is VCs themselves who are facing disruption. The reason is AI, which is driving down the time and cost to build a startup, and has led some to predict a major shakeout is coming for venture capital firms. Ten years ago, entrepreneurs looking to build a dating app would have needed millions of dollars, and years of development before they could launch the business, said Sam Tidswell-Norrish, a senior founding member of Motive Partners, who left the private equity firm in December. He says that, today, those same founders can get on a Zoom call with their team and build the app out by the end of the day.
“Capital intensive businesses don’t exist anymore,” said Tidswell-Norrish, who has launched OPUS, a professional community platform.
Ben Savage, a partner at Clocktower Ventures, agrees AI is changing the VC industry. “Companies are getting to scale in product and revenue with much smaller headcounts than we’ve seen before,” Savage said. “For sure, there’s going to be more efficient companies built.”
Jay Reinemann, general partner of Propel Venture Partners, agrees that AI will make building a startup more efficient, although he thinks building an app in “less than a day” is an overstatement, and might only be true for very simple business models. “We see AI-powered seed stage founders building faster and getting to product market fit quicker,” Reinemann said.
Big trouble for venture capital?
This AI-induced efficiency means companies will no longer need to raise multiple rounds of capital, said Tidswell-Norrish of OPUS. Instead, over the next five years, founders will likely collect enough capital in one round and then achieve profitability, he said. This means VCs will end up competing with each other for fewer allocations and will have to go downstream to find companies, Tidswell-Norrish said. “Getting to the companies earlier will be more important. VCs will have to start playing in the pre-seed and seed space,” he said.
These changes are poised to make the venture capital world more competitive but, in a twist of the old Mark Twain quote, reports of venture capital’s death may be greatly exaggerated.
Clocktower’s Savage, for instance, thinks AI will likely spur more ideas that cause founders to create more startups and possibly reinvent more segments of the economy. These businesses will need more capital, which will come from VCs, Savage said. “Venture capital is the rocket fuel for innovation,” Savage said. “The U.S. Tech industry, funded by venture capital, is the greatest source of innovation in human history.”
Matt Harris, a partner with Bain Capital Ventures, also doesn’t think the AI revolution will lead to fewer VC allocations. He pointed to the huge fundraising rounds of AI companies, which are now a majority of the venture asset class. In April, OpenAI raised $40 billion at a $300 billion valuation, while Anthropic the month before collected $3.5 billion at a $61.5 billion valuation. “The trend is in the other direction,” Harris said.
Predictions of venture’s demise due to AI are “nonsense,” Harris said. He saw a similar trend occur over a decade ago when the advent of cloud computing and SaaS helped founders develop companies more cheaply and easily. Some believed this would hurt VCs. “Instead, it led to the SaaS boom,” Harris said. More than 9,000 SaaS companies were started between 2010 and 2017, considered the core Saas boom years, according to Exploding Topics.
AI should make it easier for founders to build and copy products, which will lead to lots of competition because “tons of companies will be doing the same thing,” said Peter Walker, head of insights at equity management platform Carta. Startups will need capital to spend on distribution, including marketing and advertising so they can stand out, Walker said. “We don’t hear from too many VCs worrying that AI will ruin venture capital,” he said.