The #1 reason why AI poses a tougher challenge for VCs and entrepreneurs

by The Insights

The internet has been a major source of unicorns for entrepreneurs and VCs, and artificial intelligence (AI) is expected to follow suit. Even Softbank’s Masayoshi Son is said to be watching the AI ​​after licking his wounds following a $32 billion loss. His company is considering whether it should adopt a more aggressive venture capital funding role in the emerging field of AI. According to its chief financial officer, Yoshimitsu Goto, they are evaluating AI technology to decide if they should “just stay in defense or should we keep a balance with offense?”

VCs in Silicon Valley and beyond have increased their AI investments 10x in the past 5 years.

The common assumption is that AI will create unicorns just like the internet has been doing for 30 years – with ChatGPT being seen as the tip of the bonanza. But will it happen?

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

Revolutionary versus Evolutionary

The internet was a revolutionary technology that made existing business models obsolete. This has enabled, and often required, new business models, new skills and new assets to do old things. The internet has helped new companies with new business models destroy giant corporations because it has made existing assets, business models and skills obsolete: Bezos could get into online retail and gain a competitive advantage over established giants such as Borders and Barnes & Noble because he could sell a wider range of books, sell it cheaper due to the possibility of selling without a store, and excel online because the existing giants did not know how to sell online.

Netflix: Hastings used online streaming via the Internet and the lack of late fees in its business model to dominate and beat Blockbuster, which was hampered by its existing investment in physical stores, its reluctance to eliminate late fees and its outdated skills in brick-and-mortar retail, and executives who did not receive the threat.

· Airbnb: Chesky had an advantage over established hotel giants because it could use the internet to help anyone rent their home or rooms in their home. The existing giants could not jeopardize their own investments, or the investments of their subsidiaries, in existing hotels.

This is similar to personal computers, which were a previous revolutionary technology. PC companies destroyed many giants of the old mainframe computer industry, such as Control Data and IBM, as PCs enabled a new business model where 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 existing giants were uncompetitive. New markets had different needs and needed a new business model that included software and hardware.

But the AI ​​is different. Rather than being a breakthrough technology often requiring and enabling new business models with significant advantages that can destroy old ones, AI is more scalable and enables existing businesses to improve their advantage with assets, products, services, current organizations and skills. Even though AI has extraordinary potential, it is an evolutionary innovation that makes existing businesses more competitive. IBM’s chief business officer notes that “AI may not replace managers, but managers who use AI will replace managers who don’t.”

AI unicorns will be more difficult.

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

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

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