Venture capital is about disrupting established business models, but lately it is VCs themselves who are facing disruption. The reason is AI, which is driving down the time and cost to build a startup, and has led some to predict a major shakeout is coming for venture capital firms. Ten years ago, entrepreneurs looking to build a dating app would have needed millions of dollars, and years of development before they could launch the business, said Sam Tidswell-Norrish, a senior founding member of Motive Partners, who left the private equity firm in December. He says that, today, those same founders can get on a Zoom call with their team and build the app out by the end of the day.
“Capital intensive businesses don’t exist anymore,” said Tidswell-Norrish, who has launched OPUS, a professional community platform.
Ben Savage, a partner at Clocktower Ventures, agrees AI is changing the VC industry. “Companies are getting to scale in product and revenue with much smaller headcounts than we’ve seen before,” Savage said. “For sure, there’s going to be more efficient companies built.”
Jay Reinemann, general partner of Propel Venture Partners, agrees that AI will make building a startup more efficient, although he thinks building an app in “less than a day” is an overstatement, and might only be true for very simple business models. “We see AI-powered seed stage founders building faster and getting to product market fit quicker,” Reinemann said.
This AI-induced efficiency means companies will no longer need to raise multiple rounds of capital, said Tidswell-Norrish of OPUS. Instead, over the next five years, founders will likely collect enough capital in one round and then achieve profitability, he said. This means VCs will end up competing with each other for fewer allocations and will have to go downstream to find companies, Tidswell-Norrish said. “Getting to the companies earlier will be more important. VCs will have to start playing in the pre-seed and seed space,” he said.
These changes are poised to make the venture capital world more competitive but, in a twist of the old Mark Twain quote, reports of venture capital’s death may be greatly exaggerated.
Clocktower’s Savage, for instance, thinks AI will likely spur more ideas that cause founders to create more startups and possibly reinvent more segments of the economy. These businesses will need more capital, which will come from VCs, Savage said. “Venture capital is the rocket fuel for innovation,” Savage said. “The U.S. tech industry, funded by venture capital, is the greatest source of innovation in human history.”
