As the Generative AI fire rages on with full force, I have been thinking through the best approach for me as an operator-angel to navigate the current environment.
What makes this AI wave particularly challenging for venture investors is that it’s full of contradictions depending on what time horizon you choose to view it from.
|In the short term…||But over the long term…|
|The space is clearly in the early stages of the hype cycle.||It’s perhaps the most defining technology shift of our lifetime, likely to drive a socio-economic change like the agrarian ➡ industrial age transition.|
|Though AI is “consensus” in Silicon Valley, the agreeing crowd has a track record of being right quite often.||The only way to generate outlier returns is to be “non-consensus-and-right”.|
|Early entrants are likely to attract significant venture capital, potentially generating quick mark-ups for early investors.||Like previous platform shifts (eg. Web and Mobile), early entrants are unlikely to be the eventual winners (there were at least 8 major search engines before Google came along).|
|Pre-product stage startups commanding rich valuations is perhaps justified, given investor-demand & the hockey stick growth potential of the space.||The best way to generate above-average returns is investing in the best companies at reasonable valuations.|
Clearly, there is a time horizon tension at play here. As an investor, one doesn’t want to miss out (or appear to have missed out) on the earliest stages of the greatest platform shift in our lifetimes. At the same time, as the recent Web3 wave taught us, maintaining discipline during hype cycles is key to ultimately realizing cash-on-cash returns.
To manage this tension & navigate this wave in a risk-adjusted manner, I have been using a framework I like to call “Macro-Optimism, Micro-Skepticism”. This approach involves always keeping two opposing emotions in your mind while evaluating opportunities:
Macro-Optimism – a strong belief that AI is going to be a super-powerful force of positive change in our lifetimes. Having this belief should translate to an immense yearning to learn as much as possible while the tech is still embryonic. It should also translate to keeping an open mind about its possibilities & having the imagination to think about “if it works in this way, what could this idea become?”.
It should lead to a low-ego & eyes-wide-open mindset while meeting founders working on the frontiers of AI. It should also lead to having the awareness to not underestimate any person or idea, no matter how divergent it sounds within your current lens.
Micro-Skepticism – realizing that in the initial stages of a hype cycle:
(1) most ideas will turn out to be invalid, as how a major platform shift shapes the future is, to quote Brad Gerstner of Altimeter Capital, “unknown & unknowable”. And;
(2) the space will initially attract a lot of low-quality actors, including scammy founders, tourist investors & others with a get-rich-quick mindset.
Realizing this should translate to looking at each new investment opportunity with default-skepticism – keeping the bar high, asking hard, intellectually honest questions & calling BS when you see it. This approach requires running a rigorous conviction building process, keeping FOMO at Bay & staying true to your investing value system.
Of course, parallel processing these opposing ideas is easier said than done. As I wrote in my recent post “Investing Landmines”, we are susceptible to many biases that get further exaggerated during hype cycles. Some ways to get better at managing them include:
1/ Leveraging complementary peers or team members that can keep you honest & call out your blind spots.
2/ Using some sort of light-weight system to ensure you are asking all critical questions & spotting typical pitfalls. As an example, learning from the likes of Atul Gawande & Mohnish Pabrai, I have found simple checklists to be helpful.
3/ Consciously sleeping on a deal before pulling the trigger, giving the ‘think-slow’ part of your mind enough time to digest facts.
Ultimately, am excited at the opportunity this AI wave is providing for investors with a growth-mindset to test & fine tune their systems. While I have no doubt that all of us in the tech ecosystem will benefit from this platform shift one way or another, I also hope some of us emerge wiser from it.
to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.