TechCrunch StrictlyVC evening At the end of last week in Los Angeles, he brought together two more straight-talking investors who are currently working in artificial intelligence. Carter is the co-founder of Reum M13Early-stage firms with $2.5 billion in assets under management have been a seed or Series A investor in 17 unicorns, he says. Chang Xu is a partner in the company Base Set EntitiesIt is investing from its fourth fund, which launched in 2017 as one of the first early-stage funds focused exclusively on AI and currently has nearly $1 billion in assets under management.
On stage, a Sun-filled room in El Segundothese two were just as entertaining as they were covering how to evaluate deals in a market that has never moved so fast, how to find companies that won’t get vaporized by hyperscalers, and what the SpaceX IPO will do for LA. The conversation has been shortened and edited for clarity.
Is there an AI infrastructure bubble?
Chang Xu: Both with and without bubbles. It’s not a bubble because we’ve never seen this type of growth curve before. ChatGPT reaches $40 billion in revenue every six months – an unprecedented growth of this magnitude. We have a portfolio company called Open Art that went from $1M to $10M in the first year and $10M to $70M in the second year (and it was cash flow positive most of the time with only 20 people). The bar for good development has completely changed. When you have the ability to leverage accelerated growth, valuations don’t seem so crazy because you’re pricing it at the bottom line. On the other hand, if you evaluate every trade according to this math, there is no way it will work out well for the portfolio. So it’s a paradoxical time.
Carter Rheum: I always laugh because we’re supposedly seeing this for the first time in venture capital land, but we’ve seen it before—in the cloud, in the iPhone, in the automobile in the 1920s, when people were worried they were going to lose their jobs, and they were, and life went on. It’s steeper and faster, but the same dynamic. What’s different about this cycle is that in past eras, innovators competed against innovators—Zuk Evan, Travis, and John Zimmer. In this cycle, you have innovators competing with innovators, competing with the biggest, best-funded innovators the planet has ever seen. and it competes with the ten largest technology companies on the planet. I would argue that for the first time in history, the incumbents actually have the advantage—technology, capital, information, talent. So as some of these companies go up, they could potentially go down. I actually find it more difficult to invest in such a market. But when you get it right, you look like a genius.
How do you evaluate deals when startups are generating revenue faster than ever, but it’s unclear how sustainable they are?
Guilty: We always do the cocktail napkin count. We were looking at a case the other day – AI software for brands. I asked: how big were the winners in the last round? Will there be more brands in the world? Are they willing to pay double or triple for software in this era? We didn’t invest because we couldn’t check the math.
Xu: We stay very, very close to defensible technical differentiation because that boundary changes every quarter, maybe every month, sometimes every week. The framework we think about is investing below AI and above AI. Below AI, you have all this infrastructure that’s being rethought—databases, version control, deployment tools—because they’re all built for humans. Now you have agents using all this infrastructure, and agents require completely different things. Last year, I would have never thought you would need a new GitHub. I can count on two hands how many strong teams have gone after GitHub for agents this year. Above AI, when things get overwhelming, we always come back to: what is defensible and what is the long-term difference?
How do Are you investing in companies that won’t be broken up by OpenAI, Anthropic or Google?
Guilty: We always try to think about where they go first and where they go last. It was clear that they were following the marketing and obvious locations. So we have a thesis about friction as a moat – we love regulated industries. We just had a billion dollar exit on a company that is disrupting 911 call centers with AI. Hyperscalers may get there eventually, but as a multi-billion dollar bottom line, they won’t get there anytime soon. Healthcare – they will get there, but there are a lot of regulations that slow them down.
What keeps us all awake at night is that a penny can change. You saw them in the rearview mirror. I tell every founder: you need a microscope in one eye and a telescope in the other. Microscope for diary – what to do this week, execute. But you better get out your telescope, because the world is changing so fast. You have to be a domino player and a chess player because your board is constantly changing.
Xu: The framework we use is this: is it a market of depth or a market of speed? In speed markets, fast trackers are faster than ever – it’s all about execution speed. In deep markets, hard things are still hard. We have a portfolio company that uses transgenic chickens as an alternative to drug production because complex proteins are too expensive to produce. It’s cheaper, apparently, if you have chickens, do it. Chickens still take that long to hatch – for today (laughs). These are markets of depth and we invest accordingly.
Chicks though, are you seeing really new ideas now, or mostly new versions of old companies?
Xu: Both of them. Consensus categories — finance referral agents, healthcare referral agents — you see a lot of really strong founders going after them, and a lot of them are going to win. But the most interesting ideas are the ones where you think, ‘Huh, I don’t know if this could be a job.’ OpenArtwhen we first supported them – shortly after, Dall-E came out, Stable Diffusion came out, they started a discovery page of suggestions that you could write to get certain kinds of generative images. What kind of business is that? I have no idea. They went from $1 million to $70 million in two years and have been accelerating ever since. There is so much depth in this market that we cannot discern it from the outside. But from the beginning, these were young founders experimenting at the pinnacle of something they found interesting, and kept iterating until they found a business. If they had started a year later, they would have missed the window.
The story of VC is that it is always a story of bad ideas becoming good again. Four or five years ago, you would have said it was a bad idea to invest in anything sold in Hollywood. And then we did a series of deals in creative AI, generative AI, which led to the current wave of companies doing incredibly well—first generative images, then video, and now world models. This world has become much bigger than we could have guessed from the previous generation of software sold to Hollywood. And then you have Cursor, which everyone says is just an AI wrapper. $60 billion exit. Researchers – when my husband was doing his PhD at MIT, his salary was well below the poverty line. Researchers are now the people everyone follows on Twitter.
Guilty: I think we are still in the first round. The first wave of any technological era, however sharp and rapid, is usually the most obvious—more competition, more crowding. The second and third waves get interesting. Imagine you are a child: if you pick up a heavy rock and throw it as hard as you can and make it go over the water, the harder and faster you throw the rock, the longer the waves. That’s what we’re here for. I’m excited two, three, four years from now because there will be business models and companies that we can’t even imagine today. As a VC, these second and third wave bets are the hardest to get right – but if you do, fewer people think about it, you pay more reasonable valuations, and the ROIs are better.
The SpaceX IPO will put a lot of money in the hands of people living in Los Angeles, especially workers. What does this mean for this ecosystem?
Guilty: When Anthropic and OpenAI finally do IPO, there will be a bunch of VCs and institutional investors. Never has this much money been returned or spread as widely as what happened with SpaceX. If anyone (in this room) has a house, boat, plane to sell – definitely take advantage of this trip. But more importantly, every major liquidity event creates a second wave. The previous LA era produced things like Riot Games, Tinder, Snap. This is a different order of magnitude.
Three years ago, everyone was saying San Francisco was dead. It turned out to be a little less dead than people expected. I think it will be the same for anyone who deletes LA. There are very smart people here from a technical point of view, but also people who understand the brand, the content, the creators, the impact. This first wave is a technical wave, and the technical talent is concentrated elsewhere. But what comes after technical waves? Understanding new business models, creative thinking, culture. It’s going to be the next wave, and I think it’s most likely to be in central LA
Xu: What’s interesting is that the next frontier in AI is no longer computation—it’s pleasure. It’s making movies, making videos, making things that resonate emotionally, making things that relate to specific cultures. San Francisco has extraordinary technical talent, and that’s exactly what models get so good at automating and accelerating. It has a taste of LA.
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