Do Revenue and Margins Still Matter in AI?

Full Title

Do Revenue and Margins Still Matter in AI?

Summary

The episode discusses how the evolving landscape of AI and private markets is reshaping traditional investment metrics like revenue and margins.

It explores the challenges of valuation, the importance of founder strengths, and the future opportunities in AI and robotics.

Key Points

• Large fund sizes can still achieve significant returns, as evidenced by a16z's top-performing fund, a $1 billion fund with successful exits like Databricks and Coinbase.
• The private market has grown substantially, with a significant portion of value creation occurring in later stages (Series C and beyond) of a company's lifecycle.
• Companies are staying private longer, leading to increased competition within the private market itself, but this can also benefit investors by allowing increased ownership over time.
• The distinction between public and private markets is blurring, with private companies sometimes having access to capital at a cheaper cost due to avoiding public market volatility.
• AI is not entirely replacing traditional software but is creating new opportunities for application software companies built on top of AI models.
• The "fear of theoretical competition" can lead investors to miss out on great investments, emphasizing the importance of focusing on foundational strengths of founders and companies.
• The quality of companies in the small-cap public market has declined, making the private market a more attractive area for identifying high-growth potential.
• AI companies are expected to see margins rationalize over time as input costs decrease and market structures stabilize, similar to the evolution of cloud computing.
• The most memorable founder meetings often involve individuals with a deep understanding of their market, product, and technology, combined with strong execution capabilities.
• The future of AI will likely involve significant advancements in personal health management and robotics, creating substantial investment opportunities in both B2C and B2B applications.

Conclusion

The venture capital landscape is rapidly evolving, requiring investors to adapt their traditional metrics and approaches.

Focusing on exceptional founders and identifying genuine market needs, especially with the advancements in AI, will be key to future success.

The increasing scale and importance of the private markets, alongside the transformative potential of AI, present significant investment opportunities for the next decade.

Discussion Topics

• How are traditional valuation metrics like revenue and margins being re-evaluated in the age of AI and rapid market shifts?
• What are the most critical "strength of strengths" to look for in founders today, and how can investors avoid the trap of theoretical competition?
• Given the blurring lines between public and private markets, how should institutional investors adjust their asset allocation strategies for the future?

Key Terms

LPs (Limited Partners)

Investors who commit capital to a venture fund.

ROIC (Return on Invested Capital)

A profitability ratio that measures how effectively a company uses its capital to generate profits.

TAM (Total Addressable Market)

The total revenue opportunity available for a product or service.

ARR (Annual Recurring Revenue)

The predictable revenue a company expects to receive from its customers over a year.

EBCs (Investor Days/Executive Briefing Centers)

Events where portfolio companies present to investors.

SaaS (Software as a Service)

A software distribution model where a third-party provider hosts applications and makes them available to customers over the internet.

Timeline