Early AI development deterred entrepreneurs. Build a “wrapper” around OpenAI and you risked obsolescence with no competitive edge. Aim at something more ambitious and you needed capital only a few could provide.
That wasn’t only a mood. In January, Andreessen Horowitz surveyed the whole stack and concluded that “there don’t appear, today, to be any systemic moats in generative AI,” with the application companies struggling over “retention, product differentiation, and gross margins” — margins often “as low as 50-60%, driven largely by the cost of model inference.” The money, they reckoned, was going to the infrastructure vendors, “capturing the majority of dollars flowing through the stack.” The year then supplied its cautionary tale. Jasper, the AI-for-marketing startup that raised $125 million at a $1.5 billion valuation last October, laid off staff in July, less than a year later.
Over the past year I’ve made no fewer than seven attempts to build wrapper projects. I suspect I’m a bit luckier than most, though — I like to earn, but I also love playing with this tech.
The new paradigm for second-wave AI entrepreneurs: build a wrapper business coupled with a traditional one that would be greatly benefited by the tech. The wrapper doesn’t have to win on its own. It has to make the traditional business faster and cheaper than its rivals, in a trade where faster and cheaper decide things. Success looks like riding that efficiency to prevail in the traditional business, while building the scale and know-how to — potentially — find an AI competitive moat in that scale and in earned brand awareness.
Sequoia said something close to this last month, from the investor’s side of the table: “Act 2 will solve human problems end-to-end,” with applications that “use foundation models as a piece of a more comprehensive solution rather than the entire solution.” Their read on defensibility was that the “data moats” are on shaky ground, while “workflows and user networks seem to be creating more durable sources of competitive advantage.”
A traditional business is a workflow with customers attached.
