TechCrunch’s StrictlyVC evening in Los Angeles late last week brought together two of the most outspoken investors working in AI right now. Carter Reum is its co-founder M13an early-stage firm with $2.5 billion in assets under management that has been an early stage or Series A investor in 17 unicorns, he says. Chang Xu is a partner at Base Set Ventureswhich launched in 2017 as one of the first early-stage funds focused exclusively on artificial intelligence and is now investing from its fourth fund, with nearly $1 billion in assets under management.
On stage, in a sun room in El Segundothe two were as entertaining as they were enlightening, covering how to price deals in a market that has never moved so fast, how to find companies that won’t get ripped off by hyperscalers, and what SpaceX’s IPO in Los Angeles is going to do. The conversation has been condensed and edited for clarity.
Is there an AI infrastructure bubble?
Chang Xu: There is a bubble and a non-bubble. It’s not a bubble because we haven’t seen this kind of growth curve before. ChatGPT goes from one to $40 billion in six months in terms of revenue — that’s just unprecedented growth on this scale. We have a portfolio company, Open Art, that went from $1M to $10M ARR in the first year and $10M to $70M in the second year, [and it was] cash flow positive most of the time with just 20 people. The bar for good development has completely changed. When you have that ability to combine accelerated growth, the valuations don’t seem so crazy because you’re pricing it at terminal value. On the other hand, if you price every offer in this math, there is no way it will work well for a portfolio. So it’s a paradoxical moment.
Carter Reum: I always laugh because we pretend this is a first in venture capital land, but we’ve seen it before – with the cloud, with the iPhone, with the automobile in the 1920s, when people were worried about losing their jobs, and they did, and life went on. This is sharper and faster, but just as dynamic. What’s different about this cycle is that previous cycles had innovators competing against innovators – Zuck vs. Evan, Travis vs. John Zimmer. In this cycle you have innovators competing with innovators, competing with the biggest, most well-funded innovators the planet has ever seen, and it competes with the top 10 tech companies on the planet. And I would argue that for the first time in history, the incumbents actually have the edge—the technology, the capital, the data, the talent. So, as fast as some of these companies rise, they may fall. I actually find it harder to invest in a market like this. But if you get it right, you look like a genius.
How do you price deals when startups are generating revenue faster than ever, but it’s not clear how sustainable they are?
Rheum: We always do the cocktail napkin math. We were looking at a business the other day — artificial intelligence software for brands. I asked: How big were the winners last cycle? Will there be more brands in the world? Are they willing to pay double or triple for software this cycle? We ended up not making the investment because we couldn’t do the check out math.
Xu: We stay very, very close to what is defensible technical diversification, because those boundaries change every quarter, maybe every month, sometimes every week. The framework we’re thinking about is investing under AI and over AI. Underneath AI, you have all this infrastructure that’s being reviewed—databases, version control, development tools—because everything was built for humans. Now you have agents using all of this infrastructure, and the agents require fundamentally different things. Last year I would have never thought you would need a new GitHub. This year I can count on two hands how many really strong groups are going since it’s GitHub for agents. Above AI, when things are super crowded, we always come back to: What is defensible and what has long-term differentiation?
How do do you invest in companies that aren’t going to be taken apart by OpenAI or Anthropic or Google?
Rheum: We always try to think about where they go first and where they go last. It was obvious that marketing and the obvious places would follow. So we have a thesis around friction as a moat — we love regulated industries. We had a small exit of a billion dollars in a company that is disrupting 911 call centers with AI. Hyperscalers may get there eventually, but as a result of a few billion dollars, they won’t get there anytime soon. Health care — they will go there, but there are a lot of regulations that slow them down.
What keeps us all up at night is that it can change on a dime. You could see them coming in the mirror. I tell every founder: You need a microscope in one eye and a telescope in the other. The microscope is for the everyday — what do I need to do this week, execute. But you better get your telescope out, because the world is changing so fast. You have to be a domino player and a chess player, because your board is constantly changing.
Xu: The framework we use is: Is this a depth market or a speed market? In speed markets, fast followers are faster than ever — it’s all about execution speed. In deep markets, hard things are still hard. In fact, we have a holding company that uses transgenic chickens as an alternative to making drugs because it is too expensive to make complex proteins. It’s cheaper, obviously, if you have chickens do it. Chickens still take that long to hatch — for today [laughs]. These are markets of depth and we invest accordingly.
Despite the chickens, are you really seeing new ideas right now or mostly new versions of old companies?
Xu: Both. Consensus categories — agents applied to finance, agents applied to health care — you see a lot of really strong founders going after them, and a lot of them are going to win. But the most interesting ideas are the ones where you think, “Hmm, I don’t know if this could be a business.” OpenArtwhen we first supported them — shortly after, Dall-E came out, Stable Diffusion, they started a discovery page with prompts you could type in to get certain types of build images. How is this a business? No idea at all. They went from $1 million to $70 million in two years and have been accelerating ever since. There is so much depth to this market that we simply could not understand from the outside. But from the beginning these were young founders experimenting on the threshold of something they found exciting and kept iterating until they found a business. If they started a year later, they would have missed the window.
The story of VC is that it is constantly a story of bad ideas becoming good again. Four or five years ago you would have said it’s a bad idea to invest in anything you’re selling in Hollywood. Then we did a series of deals for creative AI, genetic AI, which led to the current wave of companies doing incredibly well — first generated images, then video, and now global models. This world was much larger than we could ever have guessed by looking at the previous generation of software sold in Hollywood. And then you have Cursor, which everyone said was just an AI wrapper. $60 billion exit. And researchers — when my husband did his PhD at MIT, his pay was barely above the poverty line. Now researchers are the ones everyone follows on Twitter.
Rheum: I think we are still in the early games. The first wave of any technology cycle, even one this steep and fast, is usually the most obvious — more competition, more people. The second and third ripples are where it gets interesting. Think back to when you were a kid: If you take a heavy rock and throw it as hard as you can and make it bounce over the water, the heavier the rock and the faster you throw it, the bigger the ripples. That’s what we’ll have here. I’m excited two, three, four years from now, because there will be business models and companies that we can’t imagine today. As a VC, these second- and third-wave bets are the hardest to get right — but if you do, fewer people think about it, you pay more reasonable valuations, and the ROI tends to be much better.
SpaceX’s IPO is going to put a lot of money in the hands of people who live here in Los Angeles — especially workers. What does this mean for this ecosystem?
Rheum: When Anthropic and OpenAI eventually IPO, it will be a bunch of VCs and institutional investors. They have never returned as much money and been spread as widely as what is about to happen with SpaceX. If someone [in this room] has a house to sell, a boat, a plane — definitely take advantage of this ride. But more importantly, every major liquidity event creates a second wave. The previous LA cycle produced things like Riot Games, Tinder, Snap. This is a different order of magnitude.
Three years ago everyone said San Francisco was dead. Turns out they’re a little less dead than people expected. I think the same would be true of anyone writing off LA. There are so many smart people here — technically, but also people who understand brand, content, creators, influence. This first wave is a technical wave and the technical talent is concentrated elsewhere. But what comes after technical waves? New business models, creative thinking, understanding culture. That’s going to be the next wave, and I think it’s very likely to be centered in Los Angeles.
Xu: What’s interesting is that the next frontier in artificial intelligence isn’t more computational—it’s taste. It’s making movies, making videos, making things that resonate emotionally, making things that connect to certain cultures. San Francisco has great technical talent, and that’s exactly what the models are getting really good at automating and accelerating. LA has a taste for spades.
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