In the most recent wave of artificial intelligence, investors are fundamentally revising what they expect of startups. Aileen Lee, a leading venture capitalist, warned recently about the extreme pressure that AI startups are facing. They are required to send product updates and new features with lightning-like speed. This shift is just a microcosm of the industry at large, where speed and agility are increasingly becoming keys to success.
Lee pointed out that while established leaders in the AI sector hold significant market share, there remains an opportunity for emerging companies to unseat them. She noted that the goal of hitting $100 million in new revenue in just one year is an ambitious target. It has proven to be a gold standard for startups—hopeful startups.
As investors adjust to this new reality, they’re paying attention to different things when looking at startups. One key determinant is if a startup is successfully creating data, which can dramatically improve its value proposition.
“If you look at how much OpenAI and Anthropic are shipping, you’re going to have to figure out how to match how much you ship, how quickly and the quality of it.” – Aileen Lee
Lee stated that technical depth is often the most important ingredient in a product’s success. She addressed the old-school yardstick of a startup’s competitive moat. She said it’s not the make-or-break factor it used to be. On the flip side, she conceded that investors continue to see the depth of a startup’s moat as a key factor.
As a wise Jon McNeill once opined during conversations about where investors focus their priorities, he mentioned that most companies that increase quickly to $5 million in revenue still have a hard time raising their next round of funding. He explained this hurdle by stating that it forces founders to create very effective sales and marketing plans.
“I think this game has changed, and it is changing dynamically.” – Jon McNeill
This change in investor sentiment goes beyond just making revenue the priority. VC Aileen Lee says that those rigorous standards were once only applied to established companies. Well, now, those same standards are being applied to seed-stage startups too. It’s a sign of the times, ushering in a new era in which early-stage companies have to show some strong fundamentals to get investment dollars.
Steve Jang of interesting.org said he was skeptical of the widespread notion that a great go-to-market strategy will make up for mediocre technology. He went on to explain that although GTM strategies are important, they aren’t a substitute for good technological underpinnings.
“I don’t think it’s 100% true to say mediocre technology, great GTM wins and raises money and gets customers. I think that it’s a necessary requirement to have both.” – Steve Jang
Investors are slowly coming to the very real truth. Only—particularly in the eyes of venture capitalists—its most successful startups don’t have the best technology, or the best products, or even the best ideas. McNeill noted, “I think a lot of investors have figured out that the breakout companies, in most cases, don’t have the best tech.”
Marina Temkin is a venture capital and startups reporter at TechCrunch. She noted that Series A investors are beginning to use these same exacting criteria to seed-stage startups too. Yet this is a huge change in investment policy. Now, for joiners in this brave new AI world, it’s up-or-out from the get-go.
“There are no clear, outright winners, even in LLMs. There are competitors nipping at their heels.” – Steve Jang