In 2023 I posted my seed stage investing framework (see here). After a few more years in venture (and accounting for the current AI-centric environment), I've updated my framework.
Identify a hair-on-fire problem, as well as a 10x better solution
We continue to search for hair-on-fire/high-value problems. Interestingly, there are more hair-on-fire problems to tackle than ever before. More sectors are investable (including ones that were previously uninvestable) and more jobs and tasks are ripe for automation.
What’s changed are the ROI expectations for software. AI can effectively read, write, speak, listen and see, which means that incremental solutions no longer get investor attention. As a firm, we skew heavily towards startups whose value propositions are either a) making customers more money or 2) slashing costs by 10x. We’re less focused on startups who help save time.
Build value beyond the AI and build stickiness
AI products often serve as the wedge that opens up a market. But as AI has democratized the building of software, many wedge products are easily replicable and are quickly getting commoditized. As a result, our expectations have shifted. Specifically, we expect founders to:
- Rapidly build out a suite of products (often within the first year)
- Becoming a multi-product business can be the safest places to be and can also provide a point of differentiation in a sea of competitors (e.g. Posthog). In many cases, there is a system of record opportunity for startups, which also requires going multi-product early and thoughtfully
- Build defensibility and value beyond the AI
- Some strategies that we’ve seen work to build defensibility include building deep industry-specific integrations (e.g. Revv integrating with the dominant workflow software in the auto body shop category), proprietary distribution partnerships (e.g. Abridge partnering with Epic in the medical scribe category) and data feedback loops
Back wartime CEOs
It's easier than ever to start a business, but it's harder than ever to win. Founders need to get more things right in a shorter period of time than ever before. There's more competition for every idea, there's more strategic thought required, and there are more battles to be fought every step of the way. Said another way, this environment necessitates wartime CEOs.
We've always prioritzed Team when investing at seed, but it's become even more important than before. While this cliche can be tiresome, it’s evident that in the current environment speed, vision, founder ambition, strategic thinking and fundraising chops matter more than ever.