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A New Playbook for AI Entrepreneurs, Improve Your Odds of Getting a “Yes” from a VC Partner - Tactician: #00110

A New Playbook for AI Entrepreneurs

If AI is accelerating service businesses does that mean we’ll get grocery deliveries even faster?

I’m waiting for the day I think about ice cream and it’s already in my freezer.

A New Playbook for AI Entrepreneurs

Key Concepts and Tactics:

  1. Understanding the Opportunity of LLMs in Labor-Intensive Service Businesses:

    • Point: LLMs can transform slow-growth, low-margin service businesses into fast-growing, high-margin operations.

      • "We believe LLMs have the power to transform slow-growth, low-margin service businesses into fast-growing, high-margin machines."

        • "Rote, clerical work that defines industries like tax prep, corporate bookkeeping, title insurance, and healthcare billing is exactly where AI shines. And because compute is cheaper than wages, AI-powered service businesses will realize transformative efficiency gains."

  2. Challenges with the Traditional Company-Building Playbook:

    • Point: Selling AI technology to incumbent service businesses is difficult due to their resistance to change and protection of customer relationships.

      • "The real challenge is distribution. Today's company-building playbook won't work. Service businesses are notoriously fickle technology laggards who are ruthlessly protective of customer relationships."

      • "Selling human-replacing technology to incumbents is either too awkward or too disruptive. Competing against incumbents as a fledgling AI company with an untrained model is a losing proposition."

  3. Adopting a "Buy and Build" Approach:

    • Point: Purchasing an incumbent service business provides the necessary data, credibility, and customer relationships to successfully transition to an AI-powered model.

      • "To build a fast-growth, high-margin, AI-enabled service business, you need data, credibility, and capital. We believe the most expedient path to achieving this is to "buy and build.""

      • "Instead of competing against or selling to, step zero is to purchase an incumbent. This gives you data, credibility, and sticky customer relationships on Day 1."

  4. Implementing the "Buy and Build" Strategy:

    • Point: Develop an AI-powered alternative to the acquired business's services, then slowly transition workflows to prove efficiency gains.

      • "Spend the first six months developing an AI-alternative to the company's services then slowly transition workflows to prove out efficiency gains. Because you own the business, you can expedite operational changes in a way no vendor ever could."

  5. Scaling the Transformed Business:

    • Point: Once the AI model is proven, scale the business through M&A, direct selling, or licensing the technology to incumbents.

      • "Once you're confident in your model, scale it up through M&A, direct selling, or licensing your tech to incumbents — or all three! The point is you've overcome the cold start and now have options."

  6. Addressing the Challenges of the "Buy and Build" Approach:

    • Point: The "buy and build" strategy requires intense deal-making, change management, and technology decisions, but those who succeed will be on a "rocketship."

      • "This gross oversimplification hides the intense deal-making, change management, and sea of technology decisions that confront founders pursuing this path. But those who succeed will find themselves on a rocketship."

Improve Your Odds of Getting a “Yes” from a VC Partner

Why Read:

  • Founders should read this to learn how VCs make investment decisions and employ a "land and expand" strategy to build broader relationships within the firm.

Key Concepts and Tactics:

  1. Understanding VC Partner Decision Dynamics:

    • Point: Understand how many partners are at the firm, their roles, and how they make investment decisions.

      • "Each firm makes decisions in different ways so understanding the firm's decision framework matters. Some firms are 'consensus-driven' and look for unanimity in the decision or near unanimity. Some partnerships are 'conviction driven' meaning they're looking for a super-committed partner who will slam his or her proverbial fist on the table to push through a deal."

  2. Leveraging Portfolio Company Relationships:

    • Point: Build relationships with the VC's portfolio company founders to gain insights into the firm's partnership dynamics.

      • "Find a portfolio company or two that they've invested in. Find one that's on the earlier-stage size or one that was raised a long time ago and never scaled and get to know the founder & CEO. They can likely give you the entire playbook of the partnership if you build a meaningful relationship with them and they trust you."

  3. Navigating the Role of Non-Partner Investment Staff:

    • Point: Understand the role of non-partner investment staff (analysts, associates, principals) in sourcing deals, screening, and due diligence.

      • "The role of these investment staff varies firm-to-firm but they often entail: Sourcing deals for partners, Helping with initial deal screening with a partner, Helping with due diligence (competitive assessments, customer calls, reference checking, market sizing, technology reviews, etc.), Building models to evaluate the deal and/or reviewing customer files, company financials, business plans, etc., Adding colour to partner discussions during a Monday partner meeting, Completing due diligence post partner meeting for thorny questions that were raised."

  4. Preparing for the Monday Partner Meeting:

    • Point: Understand the typical structure and dynamics of a Monday partner meeting where investment decisions are made.

      • "You come in (online meet sometimes) and usually have between 45 minutes to an hour to present. The best companies build a deck and a cadence to use up 50–60% of the time and save a buffer for discussions. If the questions aren't organically flowing you have 'pocket slides' after the main deck you can pull out to share more information or analysis. You leave. The sponsoring partner often outlines his or her thesis and then feedback on the company is offered. Sometimes these are love fests but usually, they are pretty brutal takedowns of why a company would or would not work."

  5. Employing a "Land and Expand" Strategy:

    • Point: Meet with multiple partners, associates, and influencers at the firm before the partner meeting to build broader relationships and address concerns in advance.

      • "Think about it … if you have 4 investment partners and a whole supporting cast of influencers and you have only met with one partner and then you appear in front of a committee of deciders who have never met you before — that's a lot riding on your pitch and the willingness of the sponsoring partner to advocate. This is Sales 101. You find a champion but then you find reasons to meet other staff before the meeting where your fate would be decided."

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