Transformational Impact of AI on Startup Investing
Updated Investing Thesis for KW Angel Fund
Market Outlook
After a tough 2023 and the market bottoming out, we are starting to see the earliest stages of investing — pre seed and seed rounds — coming back. However, the goalposts have changed. What was once a Series A is now a Seed deal.
Example: A few years ago, founders could raise an A with $500K-1.5m ARR as long if they had super high growth. That is required in today’s Seed. For an A, investors expect to see $2.5–5m ARR; and while growth is still important, profitable metrics and a path to profitability is more important.
The best companies are still growing 10%+ month/month with a min of over 50% year/year but now they need to also have a path to cash flow breakeven (either you can grow revenue faster with the current team or pause hiring at any time to get back to profitability).
Therefore, founders have to be able to grow faster or live longer by being more capital-efficient in reaching the next milestone.
I have participated in 2 deals in the last 6 months and both deals had over $200K ARR at the pre-seed stage.
What does this mean for founders:
- Lower Valuations (or Valuations are Lower)
- Longer to close a Round (or It takes longer to close a round)
- Bigger milestone goals for the next round of fundraising
- Increased Metric Focus
- Increased focus on capital efficiency
- Clear articulation of a path to profitability
2024 Investing Thesis
AI reminds me of mobile circa 2011. There are a lot of exciting things happening but in 2011 there were still very few mobile phone users and mobile phone apps, fast forward 13 years and mobile users have saturated the world and many of the biggest apps were founded during 2011–14.
New Types of pre seed deals I am interested in around AI applications for B2B that can be built in public clouds (AWS, GCP, Asure) leveraging private models (OpenAI) or open source models (Hugging Face). Looking for companies that can leverage AI price/cost advantage to quickly get to $10m ARR in 18 months or less (by selling an AI version with significant cost advantages)
- AI + Human Specialization — Startups that can use AI / LLMs to directly monetize a service or deliver a product at a major discount while simultaneously reducing cost by more than that discount
For example: an AI lawyer that charges $25 an hour (vs. $250 an hour for a human lawyer), but has much lower costs (they can get 20 hours of work done in the same time as a human lawyer). I would be looking to invest in the Lawyer + AI Eng cofounding team
- AI Applications / Workflow AI — AI on top of existing data and SAAS tools like HubSpot, Zoom, or Gmail to automate data collection, notes, research, alerts, sending emails, content creation, etc — Copilots for specific business use cases
- AI Models as a Service / Industry specific — a Snowflake-like company for joining public and 1st party data into an industry-specific model for using AI to improve a business —
examples could include: personal shopper recommendation model for Shopify, model for media mix modeling and attribution, LLM for marketing content, product marketing and messaging including social media bot to create and post B2B content
I’m still interested in non-AI in the following spaces.
- Shopify / Ecommerce Ecosystem — Saas Products that are built to help modern DTC brands built on the Shopify Ecosystem
- Cloud Data Ecosystem — apps that are built to integrate with Snowflake, BigQuery, etc
- Dev tools — built by developers for developers to help them do their job better, easier, and faster
Reminder: What I am NOT looking to invest in?
- Any companies based or focused on markets outside the US (sorry but can’t for both legal and tax reasons)
- Anything Series A or later stage
- Pre seed priced above 10m
- Seed priced above 20m seed
- Consumer focused startup
- Web3 / Crypto
- Hardware
