The #1 reason why AI is more challenging for VCs and entrepreneurs


The internet has been a major source of unicorns for entrepreneurs and VC, and artificial intelligence (AI) is expected to do the same. Even Masayoshi Son of Softbank would look at AI after licking his wounds from one $32 billion loss. His company questions whether they should take on a more aggressive VC funding role in the emerging field of AI. According to its CFO, Yoshimitsu Goto, they are evaluating AI technology to decide whether to “just stay on the defensive or should we keep a balance with attack?”

VCs in Silicon Valley and elsewhere are expanding their investment in AI by a factor of 10 in the last 5 years.

The common assumption is that AI will create unicorns, just as the internet has done for the past 30 years – with ChatGPT considered just the tip of the bonanza. But will this happen?

This is the main reason why AI will be more difficult for entrepreneurs and VCs.


Revolutionary vs Evolutionary

The Internet was a revolutionary technology that made existing business models obsolete. It enabled, and often required, new business models, skills and assets to do old things. The internet helped new ventures with new business models destroy giant corporations because it made existing assets, business models and skills obsolete: Bezos could enter the online retail business and gain a competitive advantage over established giants like Borders and Barnes & Noble because he could sell a wider range of books, sell it for less because he can do without a store sell, and excel online because the existing giants didn’t know how to sell online.

Netflix: Hastings used online streaming over the internet and the lack of late fees in its business model to dominate and beat Blockbuster, which was hampered by its existing brick and mortar investments, unwillingness to eliminate late fees, outdated physical retail skills, and executives who didn’t get the threat.

Airbnb: Chesky got an edge over the established hotel giants because it was able to use the internet to help anyone rent out their home or rooms in their home. The existing giants could not jeopardize their own investments, or those of their affiliates, in existing hotels.

This is similar to personal computers, which was an earlier revolutionary technology. PC companies destroyed many giants in the old mainframe computer industry, such as Control Data and IBM, because PCs enabled a new business model in which anyone could assemble and sell PCs without the need for capital-intensive manufacturing or human-intensive infrastructure. PCs also opened up new markets, such as small businesses and consumers, where the existing giants were not competitive. The new markets had different needs and required a new business model, including software and hardware.

But AI is different. Rather than being a revolutionary technology that often requires and allows new business models with significant benefits that can destroy the old ones, AI is more evolutionary and enables existing companies to improve their lead with current assets, products, services, organizations and skills. Although AI has extraordinary potential, it is an evolutionary innovation and makes existing companies more competitive. IBM’s chief commercial officer notes that “AI may not replace managers, but the managers who use AI will replace those who don’t.”

AI Unicorns will be harder.

This means it will be more difficult for entrepreneurs to build unicorns and VCs to fund them to replace the old giants. They can build companies in niche markets that they can then flip to the existing giants, or they can invent better products that can be bought by existing giants, or they can build new tools that become unicorns. But it will be more difficult to replace the old giants. So this evolutionary innovation won’t be a slam dunk for VCs, and Son will face a greater challenge from existing companies that can add AI to their product line and operations.

MY TAKE: Those who don’t understand the difference between evolutionary and revolutionary technologies will pay the price in the emerging AI trend. VCs and entrepreneurs will find that they will not replace the existing giants, but will have to seek growth where the existing giants cannot or cannot easily penetrate.

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