AI’s Impact on Founders
This week an entrepreneur friend pinged me about an idea. We did a call and he laid out his idea for solving a problem that impacts a large segment of society. He went on to explain how his solution is now possible only because of AI. He was energized by the idea and its possibilities. We talked for a long time, and I left the call with a new perspective.
I can’t predict the impact that AI technology will have. But I can see that AI is having an impact on how entrepreneurs think. It has entrepreneurs more excited than I’ve seen in a long time. They’re overflowing with ideas around potential solutions. They’re thinking bigger about the impact of their solutions. And they’re starting to view challenging problems as solvable.
AI is affecting how entrepreneurs think, and that’s bound to have an outsize impact on society.
I caught up with an early-stage founder considering his company’s next steps. The runway is shrinking. He’s pursuing several paths, including raising more capital or selling the company. The market isn’t as big as he initially thought, and the business doesn’t have the potential to become a nine- or ten-figure company. He’s accepted that fact and doesn’t want to pursue an option that requires a nine- or ten-figure exit for success.
The probabilities are low that this founder’s current company will get him the type of exit he hoped for when he started the company. He feels he has a lot left in the tank and wants to use that energy on something high return.
This founder is an entrepreneur at heart. He has the drive and intelligence to build something amazing. Unfortunately, the market for his first business is smaller than he and his investors envisioned. He also happened to raise capital in the 2020–2022 window when valuations were inflated. These and other dynamics have taught him painful but valuable lessons that he’ll carry forward.
This founder is part of a group of founders who, I think, will experience pain with their pandemic-era companies but go on to have wildly successful second acts. They may not realize it, but the things they’re learning and the relationships they’re building now will be immensely valuable and contribute significantly to their future success.
ChatGPT = More Vertical SaaS?
I had an interesting conversation with an early-stage founder who’s launching an AI company in San Francisco. He walked me through a demo of his MVP. Then he shared a prediction.
He believes ChatGPT will cause an explosion in vertical software solutions. Building is easy using ChatGPT, a fact that has aspiring founders flooding to build solutions using the service. The low barriers to entry and ease of building will likely prevent founders from scaling a solution that appeals broadly (i.e., horizontal software). There will be too much competition. Instead, founders will go niche. They’ll find small markets they can dominate. They’ll build solutions for painful problems that affect a smaller base of people but have been overlooked historically because of the small market size.
He also believes these companies will be able to scale faster because of ChatGPT. This, combined with the niche nature of the market, will make founders aim to sell earlier than we’ve seen historically and at less than unicorn (i.e., $1 billion) valuations (assuming they haven’t raised too much capital).
This founder’s perspective is interesting and something I want to think about more.
The Importance of a Good Data Room
An early-stage founder asked me for feedback on his fundraising deck, and I went over it with him. Then he asked me to also look at his data room and provide feedback.
The data room was well organized and included more detailed information than I’d expect for an early-stage company. I asked the founder about that, and he said it’s the expectation these days—without this level of detail, his chances of getting funded would be significantly lower.
My takeaway is that investors are focusing more on substance, and founders are starting to get the message. Investors are taking longer to evaluate investment opportunities and diving deeper into whatever data exists to help them make an investment decision. They want to understand the problem, the market potential, and whether the solution is adding (or could add) real value to customers. Founders looking to raise should be aware of this and prepare accordingly.
Fundraising: Customer References
This week, I connected with an early-stage founder who’s fundraising. A few funds that are deep in the process want to do customer diligence calls—they want to talk to the handful of early-adopter customers that are larger companies. The customers don’t understand venture capital or start-ups. The thought of talking with “investors” looking to invest in a provider of a service they deem critical makes them queasy. They’re not sure if this is a sign that the company is in trouble financially and they should rethink the relationship.
If a company has a product with paying customers and it wants to raise venture capital, the investment firms are going to want to talk to the customers. They could construe not being allowed to do so negatively. “If your product is so great, why can’t we hear that directly from your customers?” goes the thinking.
One way around this is to pitch your most important customers on your big vision. They know the product you’re offering and how it solves their current pain point, but they may not know more than that. Once you share your big vision with them, they’ll likely be more excited to be part of that journey and help turn the vision into reality. They’re also more likely to understand that going on that journey will require growth capital. When they’re asked to do reference calls with venture capital investors, the investors can be described as “partners to help provide the capital that will allow us to execute on our vision” (which is true for VC), not a financial lifeline.
Learn from Others, Then Build
A friend talked to me about an early-stage start-up because I’m familiar with the space. He asked my opinion. The space has lots of downsides, the main one being the small size of the market. And it’s complex, which makes completing transactions difficult, labor intensive, and expensive. He said he wished the founder had chatted with me before starting the company. I agreed. I learned a lot about the space the hard way and would have happily shared what I know.
Something for founders to consider doing before building a new solution is seeking out founders who’ve already built in the space they’re entering. Lessons can be learned from the successes and failures of other founders that can save lots of time, energy, and money. Oftentimes those founders are excited to share what they learned with someone who’s equally passionate about the space. It’s an activity with a high upside and relativity low downside that anyone can do.
Haves and Have Nots
I’ve been keeping tabs on several early-stage founders who are aiming to raise capital before the end of the year. Their funding experiences so far are on the extreme ends of the spectrum (for various reasons). From what I’m hearing so far, it sounds like funding rounds will end up in one of two camps.
- Fundraises will be extremely successful and engender a high degree of interest from several firms. These founders will likely be given offers to raise materially more capital than they set out to raise (which isn’t necessarily a good thing).
- Fundraises will be completely unsuccessful, with zero interest from firms. If these founders are running out of runway, they’ll likely struggle to raise a bridge round.
These initial thoughts are subject to change as the market changes. But if they hold, it sounds like an extreme case of haves and have nots this fundraising season.
Where to Begin When You’re Starting Something New?
Lots of people want to start a business but don’t know where to begin. Their uncertainty prevents them from acting—they never get off square one. It’s more common than you’d think, but it doesn’t have to be that way.
There’s a simple hack aspiring entrepreneurs can use. This hack is helpful if you don’t know what kind of company you want to start or have a list of potential companies you could start.
Find another aspiring entrepreneur (someone who’s serious) and have regular accountability meetings. They don’t have to be super structured or long. Here are a few things they could cover:
- What problems have you evaluated since the last meeting?
- What’s the result of your analysis (i.e., do you kill the idea or move further in your evaluation)?
- What are the next steps in your process?
- What’s the deadline for completion of the next steps?
The goal of the meetings is to initiate momentum, keep the momentum going, and have a sounding board for your ideas and thoughts. Accountability meetings help accomplish all of that, and then some, in a simple format.
Entrepreneurship is a tough journey that’s full of uncertainty. Founders are constantly trying to figure out what action they should take given the information at hand. You don’t have to travel alone. Find someone going the same way, and you’ll help each other get to the destination faster.
The Prepared Mind
Louis Pasteur once said that “fortune favors the prepared mind.”
This quote is simple but powerful. The greatest outcomes are more likely to belong to those who have put in the work to prepare mentally. You can see it in founders. Those who have obsessed about a problem to the point where they understand it from all angles are more likely to create a superior solution that customers will pay for. Tons of paying customers equals a big company and accelerated value creation. You can see it in investors. Those who have gone deep into a company or sector or into developing a thesis are ready to deploy capital when the right investment opportunity presents itself. Even if it’s non-consensus and unpopular at the time. They can recognize that the opportunity is superior sooner than others and seize it before its window closes.
I’m a big fan of the prepared mind. I try to learn as much as I can about concepts, companies, and topics that interest me. This has helped me uncover unique insights and given me the conviction to do things I otherwise wouldn’t have done. I’ve made it a priority to make time regularly to do this.
A prepared mind is something everyone can have—but few do. Most don’t make the effort. It’s a great life hack—a way to separate yourself from everyone else.
Fundraising Just Because You Can
I recently talked to founders building an AI start-up. They shared with me that they’re raising capital, and I asked the normal questions about metrics, runway, etc. I learned they have a significant amount of capital in the bank from their raise less than 12 months ago. This made me ask, why are you raising again if you have ample runway for executing your strategy?
Their response was simple. They’re getting interest from VC firms looking to invest in AI start-ups, and they figured they should strike while the iron is hot.
It’s so interesting to hear how different the stories of founders raising in the market right now are. Some are grinding it out to get an opportunity to pitch an investor, while others are being sought out by investors. I’m really curious to see which companies successfully complete their fundraising rounds (i.e., have money in the bank) before the end of the year.