The Opportunity in AI For Startups, How to Raise a Pre-Seed and Seed - Tactician: #0096

The opportunity in AI for startups is huge. You’ve got AI's doing everything.

“John, based on your last 100 lunches, you might enjoy a salad today.'"

10/04/24

The Opportunity in AI For Startups

Why Read:

• Valuable insights into how generative AI favors incumbents and the strategies startups can employ to succeed in this space.

Featuring:

• Sangeet Paul Choudary, Founder at Platformation Labs, Advisor to 50 of the Fortune 500

Link: 

• “How to lose at Generative AI!”

Key Concepts and Tactics:

• Value Creation in Generative AI Relies on Three Key Drivers: 

  • Point: The Generative AI value stack consists of compute, model, and workflow layers.

  • "There are largely 3 key value drivers across the Generative AI value stack.

    • Compute: The massive resources needed to run large language models (LLMs).

    • Model: The learning and the memory powering

    • GenAI. Workflow: The context into which GenAI is served."

• Big Tech's Vertical Integration Advantage: 

  • Point: Big Tech companies are well-positioned due to their presence across the compute, model, and workflow layers.

  • "Of all incumbents, the BigTech are best positioned to extend their dominance further...By vertically integrating across all three, these players get significant advantages both in terms of economics (lowering the costs of inference) and negotiating power (by squeezing out profits from players sandwiched in between their dominant layers)."

• Opportunities for Startups in the Generative AI Space: 

  • Point: Startups can succeed with model-only or workflow+model plays, focusing on specific verticals or AI-native workflows.

  • "So where do startups win in the GenAI gold rush? To win, startups will need to focus on model-only and workflow+model plays."

  • "Model-only startups may go horizontal, particularly by specialising in a particular modality (e.g. MidJourney) or may go vertical by developing a highly context-specific model. For example, Harvey’s context-rich model specialises in legal questions."

  • “Workflow+model startups will win by combining a fine-tuned model with deep customer insight to build an AI-native workflow.”

How to Raise a Pre-Seed and Seed

• Why Read:

  • Valuable insights on navigating the challenging pre-seed and seed fundraising process for startups.

• Featuring:

  • Ben Yoskovitz, Founding Partner at Highline Beta

• Link: 

  • “How to Raise Pre-Seed (and Seed) Financing for Your Startup”

• Key Concepts and Tactics:

  • Focusing on Your Startup's Needs Rather Than Industry Averages:

    • Point: Instead of obsessing over industry data, focus on the amount of capital needed to reach your next major milestone and buy enough time to figure things out.

    • "Focus on what moves your business forward. You can easily get caught in investors' feedback on how much traction you need, revenue, etc. (i.e. 'Get to $1M ARR and you're ready for the next round!') That may be true, to an extent, but it's not a guarantee that the investor, who provided the feedback, invests."

    • "Buy yourself as much time as you can to figure things out. Almost everything takes longer than expected, and if your runway is too short, you'll likely fail. Or you'll be perpetually fundraising which is brutal."

  • Delaying Fundraising to Prove Commitment and Progress:

    • Point: Demonstrate your willingness to do the hard work and make progress before seeking funding, as it shows a strong signal of commitment to investors.

    • "The further you get with your startup, the better chance you have of successfully raising capital. When a founder says, 'I need the capital or I can't really start,' it's usually a red flag. These are often 'wannabe founders' romanticizing the startup experience, who aren't prepared for the grind (and yes, starting a company is a grind)."

    • "Recently, I met a non-technical solo founder who spent 3 months learning to code and building an MVP. I told him, 'You are more fundable now than you were before, because you proved your willingness to roll up your sleeves and do the hard work. That's a founder. Plus, you now have an MVP that you're learning from.'"

  • Selling the Dream and Demonstrating Early Traction:

    • Point: Focus on selling your vision and the team's ability to execute, while using early metrics to show signals of value creation and problem-solving.

    • "At the pre-seed stage you have no metrics, or very few data points, to suggest you're on the right track. So you have to sell the dream (and the team)."

    • "All you can measure early on are the signals that suggest you're creating value and solving a real problem (i.e. consistent usage, conversion to paid, referrals)."

  • Building a Bottom-Up Business Model with Key Assumptions:

    • Point: Develop a basic business model that reveals your underlying assumptions, even if the actual numbers are likely to change.

    • "At pre-seed (even at seed) we know your business is not going to perform the way you've modelled it. It's absurd to believe the model is reality. You build the model to uncover your business's underlying assumptions. Those assumptions are key. They tell investors a lot about how you think about the business, and frankly, whether you have a chance of figuring it out."

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