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Why VCs are Hooked on AI: A Fishing Tale of Tech Investments

Has anyone else been wondering why “the money people” (a.k.a. venture capital and private equity) seem only to be interested in products boasting AI these days? 

I mean, especially in legal, the idea that firms will be ready to gobble this stuff up in the 24-27 months of runway any investment would provide is pretty dang ludicrous. Yes, many are intrigued.  But there’s still a lot around issues of IP, risk, and confidentiality that probably won’t be resolved tomorrow. 

Here's the good news: there’s a (perfectly?) rational explanation for it according to David Sacks from venture firm Craft Ventures. And it has everything to do with fishing. So let's dig in.

Venture Capital as Fisherman

Venturing into the sparkling waters of startup investments is akin to a fisherman navigating the vast expanse of the ocean, scouting for that prized catch. But when it comes to investing in SaaS startups, the equation takes on a different nuance. Imagine trading the unpredictable, vast ocean for a stocked pond, where every swim beneath the surface promises potential and reward. 

SaaS has established itself as a prime catch in the tech industry. The unit economics alone makes it a sexy proposition – build the solution once and sell it a billion times. With these undeniable benefits of accessibility, scalability, and cost-effectiveness, SaaS platforms have permeated businesses across scales and industries. As a result, the SaaS sector has attracted a lot of investment. 

Overfishing Cloud and SaaS

So what’s changed for VCs? The pond got overfished.

When cloud and SaaS became mainstream for enterprises, there was an opportunity to recreate every brick and mortar and legacy solution on earth in the cloud. HR? Yes. Tech support? Totally different in the cloud. Legal research on your phone? Mind. Blown. It’s easy to dismiss how much SaaS has changed the way we live and work, but we lived through a pretty radical shift. And that radical shift meant the pond had a whole lot of tasty fish in it. And the money people fished and fished and fished.

Cloud and SaaS are now more than a decade old and considered table stakes outside of a few conservative industries like legal, banking, and government. At the opening day of the SaaStr Annual Conference,  billed as “The Place Where the Cloud Meets," Sacks characterized the industry, before the latest AI advances, as “long in the tooth.” And what's that meant for tech investors,  especially in a weird global economic situation, is that they’re not seeing anything they think is game-changing enough to invest in. They fished the pond to the point that the only companies left in it are the ones they’ve already decided aren't the right fit.

OpenAI Restocks the Pond with Possibilities 

Enter OpenAI, ChatGPT, and all their derivative possibilities. Every company on earth can now be reimagined with generative AI. The pond has been re-stocked and is teeming with great new ideas, companies, and potential.  This is why it seems to be the only thing they're interested in – it's just the next big thing. And why wouldn't they look for that? They're in the business of turning money into more money.

Good news / bad news? Both Sacks and SaaStr founder Jason Lemkin agree – if you have a brilliant and original product that solves a real problem in a unique way, you’ll continue to attract investment. Look at the recent news from SimpleClosure, a solution that helps failed companies shut down efficiently. They just raised $1.5 million in less than 24 hours without a pitch deck. Based on my reading of the deal, I might characterize it as “without even trying.” So there's money out there for the truly innovative, with or without AI.

Your Mom Is Biased

The bad news? Your solution is probably not as interesting  innovative,  or original as you or your loving mother thinks. Investors see zillions of products and companies every year and the harsh reality is that they've probably already seen some version of what you're offering. You’re going to need to be very attractive for other reasons if artificial intelligence and machine learning aren’t a core component of your game plan.

Wrapping Up

The SaaS ecosystem has evolved immensely, and where we once reveled in the newness of the cloud, the focus has now shifted towards the boundless possibilities of AI. Venture capitalists, always on the prowl for the next big thing, are naturally drawn to this burgeoning frontier. But remember, it’s not just about riding the latest wave; it’s about genuine innovation, solving real problems, and standing out in a stocked pond. The challenge isn’t just catching the investor’s eye but proving that you’re not just another fish, but rather, the prize catch they’ve been seeking. Dive deep, innovate relentlessly, and let’s see what the future holds.

Hell, maybe DABUS is, in fact, sentient and its already all over for us. I’m up for it either way. 


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