Will AI Kill Traditional Venture Capital?
Will AI Kill Traditional Venture Capital?
VC's are piling into AI as the ultimate disruptor. But it could end up disrupting them as well.
In a post AI world human capital will become more important than financial capital. As a result the venture capital model needs to be rethought. You see, AI will empower entrepreneurs to turn their ideas into products using the power of LLM’s rather than traditional, older world resources that require overflowing buckets of capital. Entrepreneurs participating in the new AI reality mean entrepreneurs taking significantly less time and cost to get from idea to product/venture and equally less time and cost to market and scale their newbies. What used to take years and many $millions could take months and cost much less. Like shrinkflation for venture building.
AI will make traditional, non strategic venture capital entirely redundant. A kind of ghosting of the money.
Traditional venture capitalists think that AI will help them by automating the process of screening business plans and shortening the due diligence process. They believe that AI will help them research a market more efficiently and create legal documents faster. They also think that AI is a great new category to invest in. In the short term they are probably correct - but they are missing the end game. Ultimately AI will cause a new kind of venture firm to develop. It's already happening. And we take a look at a few here.
After all AI can reduce the amount of human capital needed to do pretty much every single function and process in venture building that an entrepreneur needed before. A founding team of two or three highly capable entrepreneurs could run a $multi-million dollar revenue technology or digital company on their own with AI to support and scale them. How?
AI can turn ideas into early product designs. It can then turn designs into software code. AI automatically builds web pages, mobile apps and customer support bots. Humans just need to tell the robots what to do - they will do the rest. Multi-skilled, tech savvy, experienced entrepreneurs will rule. The right venture building process aligned with the right AI tools at each stage will build the venture for the entrepreneur. The idea is the new gold.
Once the product and service is built AI will dynamically optimise its pricing, packaging and marketing. Then it will use those inputs to game out the venture’s truest financial model. As AI’s become more sophisticated they can make sure copyright is protected, patents are pending and the new business’s draft accounts are generated and payments made. So bye bye law form too - but that’s for another post…
The core costs of the business will be software subscriptions, devices, compute power and the senior experienced business people to oversee the AI’s product. As a result the path to profitability of AI powered ventures can be much, much shorter.
AI tools will be able to source the optimal investing board members and recruit an investing advisory board. The new generation entrepreneurs will have all the strategic and market-savvy help they require - without the traditional venture capital intermediary with its preference shares and dilution tactics.
And as a critical part of the venture process AI and AI assistants will source the venture money for the entrepreneurs, circumventing the traditional VC.
It will be similar to how younger generations are circumventing public social media platforms to go directly to their friends in private, encrypted chats. AI will take business builders directly to the individual investors and niche, entrepreneur-friendly funds that can add the most value at each critical point in the venture building process. Ouch, there went fundraising advisers!
Each business function that entrepreneurs would normally require will be built and managed by AI bots. From finance, legal, HR, recruitment, product, operations, marketing, sales and support. The new entrepreneurs will literally be able to build a business with revenues in the tens of millions of dollars and thousands of customers using AI throughout and just a handful of highly capable entrepreneurs managing the overall process, the product design and the critical customer relationships (where required).
What the entrepreneurs will need is access to the best venture building process. They will need to be sure to select the right AI tools and create the optimal AI prompts. Before long, AI prompts will become the new ‘everything handbook’.
This reality is already here. New ventures are already being built this way. And a new breed of pioneering venture firms are developing AI venture factories to back and build new generation companies with networks of entrepreneurs that ride off their AI venture factory process and systems.
After all, in the post AI world venture firms will focus more on human capital than financial capital. That’s the profound shift that is taking place.
The venture capital company of tomorrow will need to own the best AI venture factory operating the most advanced venture building process and will attach to it the best entrepreneurs operating each venture that is generated from it. The venture capital firm will be an AI system itself with a network of entrepreneurs that use the system. Like ‘The Matrix’ for venture!
One of these new style venture firms is Steel Perlot, backed and led by Eric Schmidt, Google’s ex Chair. The 3 year old firm says it wants to identify, invest in, and invent multi-generation platforms that can grow to billions of users and transform whole arenas of economic life.
They aim to change systems, and work in areas in which the raw material of talent and technology can yield breakthroughs and ubiquity. Sometimes they invest, often they build; if they build, they only back projects that they believe will achieve global scale. It is young, but holds the kernel of something new.
LettsGroup, is a European player and, disclaimer, The Letts Journal’s mothership. It’s a new kind of venture capital group backing and building capital efficient ventures that they believe, with their AI Venture Factory, deliver higher returns thanks to systemically better venture success rates. They are a bit further along the road with some impressive ventures already born from their approach.
LettsGroup doesn't expect all its ventures to become $1bn businesses but they do expect all of them to become profitable, sustainable companies. They build and back platform plays focused on Web3, AI and climate. They expand through technology, not people, likely eating more of their own medicine than others.
This UK based outfit has a large and growing cohort of experienced venture leaders that each work on more than one venture, presumably to keep them on their toes and so that the firm can leverage group dynamics and ecosystem driven portfolio effects. Which is mumbo jumbo for backing experienced entrepreneurs with the tools, technologies and a system to make them deliver faster and better. Access to money being a part of the ‘system’.
If new AI venture capital firms such as Steel Perlot and LettsGroup are the future, then tomorrow’s entrepreneurs might be plugging into venture factory systems and not into irreversible legal structures with little value add beyond the ‘cash’ that often hands over ownership to the venture firms that were meant to support them. The AI future should end up empowering tomorrow’s entrepreneurs more than just enriching the VC’s with a more direct AI line to the institutional investors that funded the traditional venture outfits in the first place. A kind of French revolution in the new, AI world. Vive le/la Entrepreneur!
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