Interning at Remagine Ventures (Guest Post)

As a participant of Onward Israel, I had the incredible opportunity to intern in Tel Aviv and gain valuable experience over my two month stay. I learned so much about the culture, current events, and the Israeli venture capital industry. After spending just two months in the industry, I recognize the importance of venture capital for spurring innovation, especially in Israel.

My ties to Israel run deep as my grandfather grew up in Haifa and much of my family still lives there. My grandfather Ygal introduced me to the Israeli entrepreneurial attitude. After finishing his military service, he moved to the US and started his own business designing commercial kitchens. He brought his Israeli mindset with him, emphasizing hard work, ingenuity, entrepreneurship, and determination. After hearing many of Ygal’s stories about growing and selling his business, I began to explore the entrepreneurial process.

Coming from an entrepreneurial family inspired me to take on my own small venture in high school: power washing. I had some experience washing my house and figured I could commercialize my skills. I met with a mentor, researched my competition, built a website, and created a business plan. I pitched the business to family and friends to raise money for equipment and had my first job later that week. After paying back my investors I had a growing, profitable power washing business. By the end of the summer, I upgraded my equipment, revamped my marketing strategy, and had dozens of satisfied clients who I continued to work for over the next few summers. The process taught me the value of differentiation, client relationships, time management, and personal responsibility. The experience heightened my interest in venture capital where I could work with entrepreneurs on the investor side.

As I finished my sophomore year at the University of Pennsylvania, I was looking for a summer internship. Around the same time, ChatGPT was released and I knew that generativeAI would revolutionize countless industries. I searched for internships that would allow me to explore generative AI. The Israeli landscape was very appealing because of my personal connection to the land and Israel’s reputation as a breeding ground for startups. Israel’s track record of producing innovative tech startups like Waze, Fiverr, Lightricks, and more, made Israel a natural choice for emerging generative AI startups.

One firm that stood out during this search was Remagine Ventures. Given the team’s background in media and entertainment, Remagine was focused from inception on the use of AI to create, distribute and monetise content, and have recognized the generative AI disruption early on: they began investing in generative AI in 2018. Remagine continued to invest in AI (represented in about half of their portfolio companies) and established itself as the prominent VC investing in Israeli genAI. My internship with Remagine Ventures taught me incredible lessons about venture capital, maintaining relationships/reputation, AI, and more. I learned that ultimately, greatventure capital firms have a powerful reputation which leads to differentiated deal flow.

Throughout my time at Remagine, the importance of maintaining a good relationship with founders became clear. When I arrived at the office in the mornings, I was almost always greeted by a portfolio company’s founder who was using one of the Remagine offices to work. Whenever a portfolio company needed office space, Remagine jumped at the opportunity to become closer with the team. Moreover, since many of Remagine’s investors come from the entertainment, media, tech, and gaming industries, Remagine often connected founders with companies as potential clients and for market feedback. While participating in pitches, I noticed how often we would offer to connect the founders with experienced executives in their industry, even when we expected to pass on the investment. This taught me that Remagine genuinely wants to see entrepreneurs succeed and that creating a good relationship with founders is always beneficial to the firm. This inspired me to apply this mindset in my own life and always try to help others, even when I will not directly benefit.

Another differentiator I learned about the firm was the specialization and experience of each member of Remagine Ventures. The two founding partners, Kevin and Eze, have experience starting their own high tech startups, working for media/entertainment companies, leading media/search investment offices, and starting an Israeli startup blog. Kevin and Eze are incredibly knowledgeable in the AI, media, and entertainment space. I recall several occasions when founders were impressed by Kevin and Eze’s in-depth technical questions revealing their knowledge in the space. Founders felt more comfortable during pitches when they learned they were meeting with experts in media/entertainment/tech, not just investors.

Surrounded by these tech professionals, I found myself picking up on a lot of terms, key metrics, and trends in the AI space. When I began the internship I was immediately immersed into the world of generative AI as I conducted a competitive analysis on a generative AI startup.This process taught me how to spot competitive moats, weaknesses between competitors, and evaluate potential investments. Moreover, I was able to contribute to the Israeli generative AI landscape. Learning about the emerging genAI startups in Israel further revealed Israel’s prominence in the space. The process also allowed me to learn more about different approaches to building generative AI products. The internship was overall incredibly useful for my ongoing project of drafting an investment thesis for generative AI. While I am no expert in the space, I felt confident in creating a thesis broken down by different technological approaches to creating generative AI applications.

I am incredibly grateful for this opportunity and experience. I learned so much aboutIsraeli venture capital and generative AI. I am excited to return to campus with these lessons about venture capital and beyond. My appreciation for the country has grown as I now recognize, more than ever, the high quality startups emerging from Israel. I am inspired by the Israeli entrepreneurial spirit and look forward to applying this mindset in my future.

Now it’s official – Gartner claims Generative AI has reached the peak of hype cycle

GenAI startups secured $14.1B in the first half of 2023 — more than 5x 2022’s year-end total. Many investors complain that the technology is over hyped -and now it’s official – generative AI is at the peak of Gartner‘s hype cycle for emerging technologies in 2023. This comes months after ChatGPT traffic has started to decline, as I covered on a previous post on VC Cafe.

“The Hype Cycle for Emerging Technologies is unique among Gartner Hype Cycles because it distills key insights from more than 2,000 technologies and applied frameworks that Gartner profiles each year into a succinct set of “must-know” emerging technologies. These technologies have potential to deliver transformational benefits over the next two to 10 years “

Gartner

Reaching peak hype doesn’t mean that the potential of generative AI isn’t real. After all, the adoption of generative AI has been faster than many other technologies, including smartphones. According to eMarketer, generative AI adoption is forecasted to climb to 77.8 million users over the next couple of years (doubling adoption rate of smartphones and tablets).

Just last month, Amazon CEO Andy Jassy revealed that every team within the company is actively working on generative AI projects, spanning entertainment, AWS, advertising, and devices. Jassy expressed the importance of GenAI, saying it will be at the heart of operations and represent a significant investment and focus for the company.

Reaching peak hype however, means that the expectations and buzz are at a max point. I expect that we’ll continue to see generative AI enter the enterprise, but as previously covered on VC Cafe (link in comments) there are major uncertainties in adoption as a result of:

  • Security
  • Copyright/ training data
  • Inaccuracy / model hallucinations
  • Data privacy
  • Pending regulation

According to the latest McKinsey survey on the state of AI in 2023, 79% of all respondents say they’ve had at least some exposure to gen AI, either for work or outside of work, and 22% say they are regularly using it in their own work. That said, when it comes to enterprise adoption, many organisations are reluctant to embrace generative AI at scale yet and only 21% have policies about using generative AI at work (interestingly, Samsung banned employees from using ChatGPT as employees were pasting internal data, Google banned the use of AI chatbots including its own Bard, etc.

The Gartner report also highlights other emerging technologies that in the next 10 years will present benefits for early adopters, including:

  • Emergent AI – These technologies include AI simulation, causal AI, federated machine learning, graph data science, neuro-symbolic AI and reinforcement learning
  • Developer Experience (devx) – DevX refers all aspects of interactions between developers and the tools, platforms, processes and people they work with to develop and deliver software products and services.
  • Pervasive Cloud – Key technologies enabling the pervasive cloud include augmented FinOps, cloud development environments, cloud sustainability, cloud-native, cloud-out to edge, industry cloud platforms and WebAssembly (Wasm).
  • Human-centric security and privacy – Key technologies supporting the expansion of human-centric security and privacy include AI TRISM, cybersecurity mesh architecture, generative cybersecurity AI, homomorphic encryption and postquantum cryptography.

At Remagine Ventures, we started investing in generative AI in 2019, way before the hype. If you’re an Israeli or UK founder starting to build a company in this space, we’d love to chat.

The State of Consumer Tech in Israel in 2023

While Israeli startups successes are well known in the B2B space (cybersecurity, enterprise tech, devops…), B2C startups are unsung heroes… The landscape of B2C tech in Israel is blossoming, despite several challenges. Whether it’s gaming, commerce/ DTC or creator economy, there are many Israeli startups selling at over $10M and even $100M in annual revenue. As previously highlighted on VC Cafe (based on research by Sapphire Ventures), while many funds avoid B2C investments, consumer startups can create extremely lucrative power-law returns for venture capital investors.

Israeli B2C – Let’s start with the high level picture.

I recently attended the Meta Marketing Summit in Tel Aviv, which shined a spotlight on Israeli B2C tech. Meta of course has an interest in championing B2C startups – most of them use Meta for user acquisition (it’s easier to acquire consumers on consumer platforms like Meta and Instagram, which drives a big proportion of Meta’s revenue.

Here are some high level numbers that might surprise you:

B2C Venture Capital Investments in Israel

To the most part, Israeli VCs shy away from B2C startup investments. So much so, that Meta recently launched a program to educate Israeli VC funds on the opportunities in the consumer market. According to the figures presented in the conference, approximately 25% of total VC investments goes to B2C startups.

Israeli B2C champions

Back in 2018, when I last published the state of Israeli B2C startups on VC Cafe, I included success stories like Fiverr, Gett, Lemonade, MyHeritage, Houzz, Bizzabo and others. Much has changed since then. Many exited or IPO’d (and subsequently lost much of their value in the recent downturn), but new success stories have also emerged. And new technologies, like generative AI, are creating new opportunities for founders to stand out in the consumer space. I wanted to highlight a few of the ‘old school’ B2C success stories, several of them are “Centaurs”, or startups that passed the $100M revenue mark. But I also wanted to highlight some of the emerging B2C startups that have received less international recognition, but are on a promising track.

The “old school” Israeli B2C incumbents (source: VC Cafe)

10 established Israeli B2C leaders

  1. AI21 Labs – developer of the Jurassic LLM (small rival to GPT) and Wordtune, a generative AI writing assistant for documents (raised to date: $118M)
  2. eToro – fintech portal for financial news, e-trading and crypto (raised $464M to date)
  3. K-Health – a personal health assistant powered by AI, helps patients triage symptoms for remote doctor consultations (raised to date $333M)
  4. Minute Media – a UGC content platform for sports, providing the voice of the fan and the voice of the player across multiple brands in soccer, NFL, NBA, MLB, eSports, etc. Crossed the $200M in revenue and reached over 400 million unique users. (disclosure: Remagine Ventures is an investor).
  5. Maelys – creator of direct to consumer cosmetics for women (focused on body reshaping), already passed the $100M mark in revenue.
  6. Moon Active – the casual games studio and creator of the hit game coin master, was rumoured to make $500M in Ebitda in 2022.
  7. Papaya gaming – the skill gaming platform that enables players to compete with one another to win cash wagers. Surpassed the $100M revenue mark in 2022.
  8. Simply (formerly Joytunes) – the suite of music teaching apps (piano, guitar and singing) app passed the $100M revenue from consumer subscriptions in 2022.
  9. Lighttricks – the suite of mobile apps for photo and video editing, and most recently generative AI photo and video generation. Passed the $100M revenue mark in 2022.
  10. Mixtiles – turn your photos into framed wall art. I might be biased as a user, but it’s a great product and service. Funding undisclosed.

You can find more ‘old school’ Israeli B2C startups in Dan Eblagon’s 2019 post.

10 up and coming Israeli B2C champions

  1. Riverside.fm – an online podcast and video studio (founded in 2019, raised $47M to date)
  2. Lumen – the world’s first hand held device to track your metabolism using your breath (founded in 2014, raised $80M to date)
  3. Sightful – creators of the Spacetop, the world’s first AR computer, without a physical screen, but with a 100 inch virtual screen (founded in 2020, raised $61M to date)
  4. Faye – consumer centric travel insurance. Faye said it has generated “millions” of dollars in premiums during its first year and expects to quadruple revenue in 2023. (started in 2019, raised $18M to date)
  5. Atly – a community based map, designed to help people discover their next favorite place by providing insights shared by others with similar interests (founded in 2018, raised $33M to date)
  6. Candivore – an Israeli gaming studio, developer of Match Masters, a competitive match-3 puzzle game. The company recently reported it passed 50 million installs and $200M in revenue. (founded in 2018, raised $22M to date)
  7. HourOne – generative AI tex-to-video based on human presenters. HourOne’s video creation platform powered by AI to train anyone or explain anything. The first company to launch an app to capture yourself as a virtual character. (Founded in 2019, the company raised $25M to date). Disclosure: I’m an investor and board member via Remagine Ventures.
  8. Empathy – digital companion for navigating bereavement. (founded in 2020, the company raised $43M to date)
  9. Spiritt – text to mobile app. (founded in 2019, raised $13.5M to date)
  10. Zoog – a mobile app to connect families, using AR. One of the first companies (outside of Disney) to get access to the Snap Camera SDK, Zoog has some of the best conversion metrics I’ve seen for a B2C consumer app. Disclosure: a Remagine Ventures portfolio company. (Founded in 2020, funding undisclosed)

The challenges of B2C startups and what’s next for Israeli B2C

Funding is not easy for any startup, but it gets even more challenging for B2C startups. Investor expectations on user validation are high, and founders have to navigate the challenging battle of acquisition, retention and churn, while maintaining healthy CAC/ LTV ratios.

While a lot of startups choose to remain in stealth, I’m excited about the new crop of generative AI startups in Israel that are either creating B2C products, or helping other B2C startups scale with the power of AI. From AI generated ads / creative, to conversion optimisation tools, automated customer success and automated pricing/ promotions to increase revenue.

It’s also important to mention that the talent in this space has massively increased in the past 10 years. We are now seeing the alumni of some of the old school companies, as well as former employees of the tech giants that gained B2C experience, form their own companies and bring their best practices into the market.

As one of the few funds that invests in Israeli B2C startups at the earliest stage, I believe the future of Israeli B2C tech is bright.

Generative AI mega rounds and opportunities for Israeli startups

I was interviewed by TheMarker (Hebrew only) on why Israeli startups haven’t been part of the mega funding rounds in AI. I thought it’s a good timing to elaborate on where I see opportunities for Israeli startups in this rapidly growing space.

To put things in context, global venture funding in Q2 2023 reached $65 billion, an 18% decline quarter over quarter, and a 49% drop compared to the second quarter of 2022, when startup investors spent $127 billion, according to Crunchbase.

In comparison, Israeli venture capital investments declined even further in the first half of 2023, to $3.2 billion, a 73% YoY drop, according to a new report by Viola.

Amidst this bleak funding environment, AI has been a saviour, reports the WSJ. Companies categorized as AI in Crunchbase raised $25 billion in the first half of 2023, representing 18% of global funding. That includes the $10 billion round into OpenAI, the $1.3 billion round into inflection as well as smaller rounds, like the $105M seed round into 4-week old Mistral, a French startup developing LLMs to rival OpenAI.

Most of the companies that raised these mega rounds are relatively early stage in terms of product and monetisation (if at all) and about half of the companies that raised large sums, are developing LLMs, which generally requires deep pockets to cover 1) cloud costs, 2) expensive deep learning engineers 3) get the data to train the models. That’s not to say that application layer startups didn’t raise large funding rounds: Jasper ($125M), RunwayML ($141M) Tome ($43M), ElevenLabs, But Israeli startups, to a large extent, have been excluded from this trend, only securing smaller round.

The state of Generative AI startups in Israel

According to The Global AI Index by Tortoise Media, the first index to benchmark nations on their level of investment, innovation and implementation of artificial intelligence, Israel is the 7th most attractive AI hub globally.

The Global AI Index (source)

To date, AI21 Labs is the only Israeli startup developing LLMs (it raised an impressive $64M in July 2022), and most of the companies operating in this space are in the application layer or the tooling/infrastructure layer. Another Israeli founded startup that raised significant amounts is Pinecone ($100M series B in April), a vector database for data scientists.

In the last version of the Israeli generative AI landscape that we, Remagine Ventures, published in April 2023, we listed about 71 startups. We’re in the process of updating the landscape (you can add a company via this form or by scanning the QR code) and have identified at least 40 new startups in this space where generative AI is the company’s main value proposition/ tech stack, not including all the incumbents like Wix or Lemonade, who have started incorporating generative AI features into their products.

But these companies are entering an increasingly competitive market, where fundraising has become tough. Are they too late?

The Israeli generative AI startup landscape (v1, April 2023)

It’s not easy for investors to allocate in this space

Back in January, I published “Investing in Generative AI startups” in an effort to share my considerations allocating capital in this space as a venture investor. In a nutshell, there are a lot of challenges in the space and investors are being picky. Six months later, the speed of change has nothing but accelerated and the complexity increased.

However, as Dawn Capital pointed out in their recent thought piece on the rise of generative AI in Europe, there are two important mitigating factors for investors:

  1. The speed at which businesses and users can create AI applications has been turned on its head
  2. The cost to quality ratio of outcomes has reduced dramatically

Investors who dismiss generative AI companies and jump to the conclusion that there are ‘no investable opportunities for startups in generative AI’ are taking the lazy way out which supports their decision to stay on the sidelines. As John Luttig writes in his excellent post ‘Hallucinations in AI‘, while it’s unreasonable to expect that generative AI will change everything overnight, there are many opportunities for startups. I tried to consolidate my thoughts as well as other perspectives from leading venture capital funds.

The European Generative AI landscape (by Dawn Capital)

Opportunities for startups in generative AI

For many in the tech industry, the current wave of VC investments in AI companies represents a new bubble. Others talk about the scale of the AI revolution as a massive platform shift as big as the introduction of the iPhone. Regardless of where you stand on this debate, there’s no denying that generative AI presents a huge opportunity in terms of economic value. $4.4 trillion dollars a year. That’s the economic impact of generative AI per year, according to new research by McKinsey. Will startups reap the fruits of this new trend, or is it the battle of giants?

AI Vertical SaaS – As mentioned by Index Ventures in a recent post, there’s a rise in AI native SaaS companies, building automations for specific industries. I’m already seeing interesting teams tackling the adtech/marketing tech stack, and could see this expanding to many other verticals where Israel has strong talent including cybersecurity, developer tools, fintech, retail tech and commerce, etc.

Workflow automation – the reason Jasper.ai is still in business despite ChatGPT’s popularity is the fact they embedded their product (content copyright for marketing) into their clients workflow. Marketers who are creating copy for campaigns appreciate having everything plugged in so they can take the AI generated copy and easily put into action with the tools they’re used to working with. I can imagine there are opportunities here across industries/verticals.

Neural search and vector databases – as mentioned in my previous post on VC Cafe, search is being transformed by AI. Vector search (like Pinecone) will become the preferred way to store and manage unstructured data. While the consumer space tech is dominated by Google, the enterprise vector search, utilising the organisations own data and applying the power of AI, remains an attractive opportunity for startups.

Autonomous agents – while technologies like AutoGPT or BabyGPT are still not mature (as I wrote on my post on AgentGPT), but their goal-seeking attributes make them an attractive interest area for technical founders. Imagine autonomous agents that help a brand reduce churn, increase basket size, post social content for maximum impact, etc.

Building on top of the Open Source generative AI stack – Open source LLMs are constantly increasing in quality and are likely to continue get better. For example, MosaicML released MPT-308, an open-source model that is free for commercial use and outperforms GPT-3. This trend can dramatically reduce the costs for startups, reduce the reliance on big companies and create a market for tooling and infrastructure companies to build on top of the multi-model stack. While closed LLMs like OpenAI, Anthropic and Cohere will continue to have an edge in terms of quality, open source LLMs will continue to grow in popularity.

Multi modal LLMs: today, the solutions in the market are primarily text, image, video or voice based. We’re starting to see the first multi modal AI agents, where users are able to make an input in one modal, say voice, and get the output in another. One example of this is Imagebind by Meta. Early adopters in this space can come up with interesting use case that aren’t currently being addressed by ChatGPT or Bard.

Generative AI for media and entertainment. Generative AI has the potential to revolutionise media and entertainment, by creating new forms of content, personalising the user experience, and improving the efficiency of production. I covered this in my post on generative AI in gaming, and my partner Kevin Baxpehler wrote about the impact of generative AI in media and entertainment in this VC Cafe post.

If you’re an Israeli founder building in this space at the pre-seed level, please don’t hesitate to get in touch.

Has Generative AI hype peaked?

I recently saw an interesting stat. Crypto fundraising was down 78% in the first half of 2023. If you recall the crypto craze of 2021 with Superbowl ads, celebrity endorsements and 7 figure NFT purchases, the fall in hype resulted in a dramatic fall in funding. Is generative AI headed in the same direction?

Generative AI, on the other hand, seems to be going from strength to strength. But is that really the case? After slowing down its growth rate over the past three months, ChatGPT saw a 9.7% drop in worldwide traffic from May to June, according to Similarweb.

Have we reached generative AI peak?

In addition, a look at Google Trends, shows that consumer search volume is also dropping for terms like ChatGPT, OpenAI, Generative AI, GPT, etc

A recent survey of 2,000 Americans by TheVerge revealed that despite the media attention, fewer than 60% of Americans have heard or tried ChatGPT.

Not so fast

Take Character.ai for example, the company that raised $250M from A16Z to develop LLM chatbots that can act as a specific character.

Character AI attracted 280 million web visits last month, growing 60% month-over-month, with nearly 30 min average session duration.

Interestingly, according to Google Marketing, AI searches are actually growing: “people’s interest in the topic of “artificial intelligence” on Google Search, which has increased by 3.5X year-over-year in the United Kingdom.1“

An in earning calls, “Generative AI” experienced a 129% increase in earning call mentions in Q2 2023 compared to the previous quarter.

So which one is it? Are we on the way up or down in generative AI use and adoption?

Generative AI is still in the early innings

Hype coming down is probably a good thing, but I don’t think generative AI is going away anytime soon. I expect to see many more existing companies incorporating generative AI features in their existing products and services (see Dropbox, eBay, Canva, Adobe, Salesforce etc) as well as new startups working on vertical AI solutions, industry-specific automations and tooling for deploying generative AI safely in the organisation.

A case in point, Dawn Capital published an interesting take on the potential of generative AI startups in Europe. Compared to other tech waves, generative AI is a a space where European (and Israeli) startups have the potential to play a big role at every level: from foundation models (open source) to the tooling and infrastructure of LLMs, to the application layer.

The future of search is being reinvented with generative AI

I spent a chunk of my career as a product manager in search (Shopping.com, GLG, Ask.com, AOL and Google) so I find this particularly interesting. Until now, to succeed in search companies needed two things: 1) an index of the web 2) an algorithm to organise the results. In the early days of the web, companies like AltaVista, Excite, WebCrawler and others competed in becoming the search engine of choice. But two years after Google came to the fore in 1998, Google became the number one search engine and “Googling” has become synonymous with web search. Sure, there is Bing, DuckDuckGo, Ask.com and a few others, but no one comes even near Google in terms of market share or mind share (90.

Global search engine market share in May 2023 (source)

However, since the introduction of ChatGPT in November 2022, user habits (and perhaps expectations) began to change. It felt like magic to just type a question in natural language and have the answer formatted, generated, and iterated, on the spot.

Why should users sift through ads and 10 blue links for the information they’re looking for if it can just be generated with LLMs and tailored to their specific query/prompt? And if you still want to do a web search, wouldn’t it be better if it was enriched with AI? Think about it for a second, since the introduction of ChatGPT, do you find yourself Googling more or less?

In December 2022, just a month after the introduction of ChatGPT, Google understood the risk as well and launched a ‘code red’ – a company-wide emergency effort to tackle generative AI and come back with an adequate response to ChatGPT and Microsoft Bing. In the six months since, Google worked hard to annouce a suite of new generative AI (namely Bard, Google’s chatbot which started off with a wimper but got much better shortly after) as well as a slew of new products and implement generative AI features across search and Google Workspace (some have been announced but not yet launched at Google Search Labs).

On May10th, at Google I/O, Google took the first steps on its mission to re-invent search and launch a number of generative AI powered products:

With new breakthroughs in generative AI, we’re again reimagining what a search engine can do. With this powerful new technology, we can unlock entirely new types of questions you never thought Search could answer, and transform the way information is organised, to help you sort through and make sense of what’s out there.

Google Blog
Generative AI in search, first image released by Google
Shopping is another area where Google started implementing generative AI powered search (https://blog.google/products/search/search-generative-ai-tips/)

The race to intimacy in search, an AI powered experience

There are a number of factors driving the adoption of generative AI in search.

The combination of ChatGPT, Bing’s integration of LLMs in search and Google’s embrace of generative AI technologies signalled that we’re entering a new paradigm in information retrieval with LLMs. We’re moving away from the 10 blue links (and sometimes 10 blue ads) and moving into something different.

In a recent All In podcast episode, Brad Gerstner, CEO of Altimeter Capital, quoted Richard Barton, co-founder of both Expedia and Zillow, two of the most popular vertical search engines (travel + real estate) referred to this new era of search as the ‘race to intimacy’. A conversational UI, that changes the user experience from query–> link to personalised extraction of knowledge. where rather than sift through noise to find an answer, users will generate a specific result to match their needs.

Watch this short clip (mixed with the normal banter between the hosts):

The Race to Intimacy (credit: All In podcast)

The new gen AI search companies

A number of new startups are trying jump on the generative AI search wagon. The strategy deck conveniently mapped the new players in Gen AI search and sized the market at $200 billon.

Most startups in this space is still under the radar, with the exception of Perplexity, which offers citations of sources for its generative AI search, something that to this day ChatGPT did not do (but Bard started to) as well as the ability to personalise the results based on the user’s bio, language and location.

You.com is another one, which offers to democratise search and let users vote on what’s the most helpful link for a query (vs. Google’s ranking which is driven partly by SEO). The company raised a $25M series A in July 2022.

The rest of the competition in the generative AI search space is focused on enterprise search. Much of it today belongs to Algolia. Makes sense, as companies can adopt a SaaS model and not require huge scale to monetise via advertising.

Challenges galore

Like any tech advancement at scale, to succeed in this endeavour requires deep pockets: cloud resources and costly GPUs, expensive AI engineers and a working business model, all of which Google already has. But more than anything, it requires a huge amount of data, which is perhaps Google’s biggest competitive moat. Some companies, like Neeva.com, the first gen AI powered search experience, shut down earlier this month. According to the company’s founders, Sridhar Ramaswamy and Vivek Raghunathan:

Neeva’s failure was due to its inability to attract enough users, the rise of generative AI and LLMs and the current economic environment

Search Engine Land

In addition, companies using LLMs (without developing the underlying foundational models), face disruption from other competitors using the same APIs and risk falling behind in their technology stack.

If all that wasn’t enough, you have the problem of model hallucinations, where the conversational UI offers an answer that is well articulated, but completely wrong. It’s not that wrong information doesn’t appear at Google today, but under Google’s PageRank model, it’s unlikely that a site with wrong information will climb to the top of the search results page.

Finally, there’s competition. I referred to this in my post on incumbents vs. upstarts.

Open questions

Overall, I think competition is good for consumers and offers more choice and incentive for companies to innovate. While web search requires huge resources, I believe that smaller LLMs and open source technology will play a big role in creating specialised vertical search engines for topics like health, legal tech, travel, education, etc and there lies the opportunity for startups.

Impressions from Sam Altman’s talk in London

Sam Altman, founder of OpenAI, is doing a European tour at the moment, and I was one of the attendees of his London talks at the Londoner, a swanky new London hotel, organised by the Oxford Guild Business Society. The format was Q&A moderated by Abbas Kazmi, chairman of the Guild followed by questions from the audience.

I thought It would be interesting to share a few nuggets with readers of VC Cafe, given the huge impact OpenAI is having on the world, but also as part of the general debate about AI regulation, AGI, etc.

Sam Altman and Abbas Kazmi, May 23, 2023 (photo credit: Eze Vidra)

Thanks for reading. I recommend a few of my earlier pieces on generative AI:

Excited to continue investing early stage founders building the future of generative AI with Remagine Ventures.

Generative AI: Incumbents vs. Upstarts

There’s an interesting thing happening in the generative AI world.

More and more, established companies are leaning into generative AI by either adding generative AI features to their existing suite of tools or partnering with AI companies (mostly OpenAI or the open source HuggingFace) to launch entirely new products. Their deep pockets, brand recognition and existing infrastructure offer several advantages.

Examples includes companies like Zoom with ZoomIQ, Bloomberg with BloombergGPT, and of course Google and Microsoft with their slew of AI-powered enterprise and consumer products. The list goes on. On the other hand, check out ProductHunt or a few AI newsletter and you’ll quickly hear about more than 1,000 generative AI startups, with new ones popping up daily.

Don’t get me wrong, AI is no silver bullet. Chegg, which lost over 40% of its stock value after the CEO remarked that the company’s tutoring product is being challenged by ChatGPT, has been working hard to incorporate generative AI features into their own product with GPT-4 in the form of CheggMate, but so far with little results.

There’s a big question being asked by investors in generative AI right now: who will reap the most benefit from this innovation. Is it startups or incumbents?

According to CBInsights, there are already 13 generative AI unicorns, but despite the peak hype and constant media attention, it’s hard for new startups to stand out in this space and VCs are finding it difficult to place their bets. As I mentioned in my post on the LLM Benchmarking, venture capital investment in AI startups was down 43% in Q1 2023.

My hypothesis on why AI investments are down significantly in Q1 2023:

First signs of trouble in the horizon

We’re starting to see the first signs of generative AI upstarts folding or pivoting. For example, Neeva, a startup that tried to push the boundaries of web search and challenge Google by being the first ‘AI-powered’ search engine, found the hard way that’s one thing building a product and quite another to get users to change their habits and switch search engines. The company is shutting down its consumer product in early June.

Neeva is a reminder that for a startup to be successful in the generative AI space, they need not only to nail the product, but also the distribution (a key advantage of the incumbents) and their unit economics – a tougher job in a constrained capital environment where rounds have gotten smaller and there’s a high cost and shortage/cost of GPUs.

The big opportunities are still out there for the taking

If you listen to what the top CEOs and thought leaders are saying about AI, the opportunity is huge. For example, take the latest remarks by Sundar Pichai, Alphabet’s CEO:

“Well, definitely I see it as an extraordinary platform shift. Pretty much, it’ll touch everything: every sector, every industry, every aspect of our lives. So one way to think about it is no different from how we have thought about maybe the personal computing shift, the internet shift, the mobile shift. So along that dimension, I think it’s a big shift.”

Sam Altman and others say that the foundational model race (and funding opportunity) is largely over and that the competition now is on the applicational layer. I tend to agree, with the exception of open source LLM APIs which are taking off massively and not following much behind in quality from Google’s Palm-2 or OpenAI’s GPT-4. This Open LLM Leaderboard on Hugging Face is a good example of the developer excitement and engagement in this space. In the future, there will be less platform dependency (as not all startups will be built on 1-2 APIs only in the application layer).

Huggingface Open LLM Leaderboard – take a look at the evaluation benchmarks

I’m particularly excited about the following opportunities at this point in time:

It’s hard to predict whether the big winners from generative AI will be the startups or the incumbents, and despite the perception of a crowded market, I think we’re still early in this space. If Generative AI is truly a platform shift like the early days of mobile and cloud, think about the first generation of apps or cloud services. They were much less impressive than what you have now, and also there weren’t that many new apps in the very early days. But the number of apps kept multiplying (there are 500-600 new games introduced to the app store every day vs. a few dozen in 2008 or so when the iPhone came out). And many of those games that didn’t exist in the early days of the iPhone are billion dollar companies.

What else do we know? Models will get smaller over time, the computation will move from the cloud to on-device, and costs for incorporating generative AI in both new and existing products will keep dropping.

I’d love to connect with more generative AI founders that are tackling the big opportunities in this space.

Impact: Reshaping Capitalism to Drive Real Change

“The old capitalism was about making money. The new capitalism is about making a difference.”

Sir Ronald Cohen, Impact

Sir Ronald Cohen is considered by many to be the father of Impact investing.. He was born in 1946 to a working class immigrant family in London and attended a State school. After graduating from University, he joined McKinsey & Co. as a management consultant and in 1977, he co-founded Apax Partners, a private equity firm. Apax Partners became one of the most successful private equity firms in the world, and Cohen became a billionaire.

In his book “Impact“, Sir Ronald Cohen (SRC) argues that the current capitalist system is not working for everyone, and that we need reshape Capitalism to create a new system that is more inclusive and sustainable.

In simple words, SRC claims that before impact investing existed, we measured the attractiveness of an investment opportunity simply by measuring its NPV/Future cashflows/ profit potential. But in his view, an important new addition to investment decisions should be the impact the investment might have on society, the planet, etc.

Cohen’s vision for a new capitalism is based on the idea of impact investing. Impact investing is a type of investing that seeks to generate what’s called a “double bottom line”, a combination of both financial and social returns. This means that impact investors are looking for investments that will not only make them money, but that will also have a positive impact on the world. SRC puts this framework to practice in Social Finance, a social impact investment firm he founded to manage his philanthropic activities.

Impact investing as a tool for social returns

Cohen believes that impact investing is the key to creating a new capitalism that works for everyone. He argues that impact investing can help to solve some of the world’s biggest problems, such as poverty, inequality, and climate change.

The key principles of Impact Investment

In “Impact,” SRC provides a roadmap for how we can reshape capitalism and create a new system that is more inclusive and sustainable. Below are the key principles of impact investing and the trade-offs investors might want to consider to maximise impact:

5 takeaways for startup founders and investors looking for impact

If you are a startup founder or an investor, there are a few key takeaways from “Impact” that you should keep in mind.

First, you should consider the impact of your business on society. What positive impact can your business have on the world? How can you use your business to solve some of the world’s biggest problems?

Second, you should look for ways to measure the impact of your business. This will help you to track your progress and to ensure that you are making a real difference. This in an area that is currently improving with AI and new tools that make impact measuring easier and more actionable.

Third, you should connect with other impact investors. There is a growing community of impact investors who are looking for businesses to invest in. By connecting with this community, you can raise capital and get support for your business.

Finally, you should never give up on your vision. The world needs more businesses that are making a positive impact. If you have a vision for a business that can make a difference, don’t give up on it.

The book is a good reminder that you don’t have to be a billionaire to make an impact. As the back cover says, Impact is about answering the question ‘What kind of world do we want to live in?’

Personal reflection

The book made me reflect on the amazing opportunities that were given to me as a result of impact investing as well as my own impact as an investor and member of society. Sam Zell sadly passed away yesterday at the age of 81. Zell is mainly known as a billionaire entrepreneur and real estate tycoon. But Sam Zell’s impact investing in Israel’s Zell Entrepreneurship program for outstanding students, changed my life and and the lives of its many alumni.

While I wouldn’t consider myself and our work at Remagine Ventures as “Impact investing”, the book helped me put in context the activities and values we incorporated in our work. For example, my partner’s initiative to launch a paid internship program for Ethiopian students at the Reichman University in partnership with Israel at Heart, or my work at Techbikers, that raised close to $1 million to date to build 11 schools and 50 libraries in the developing world, in partnership with Room to Read.

If you are interested in learning more about impact investing, I encourage you to read “Impact” by Sir Ronald Cohen. It provides a vision for a new system that is more just and equitable, and it offers a roadmap for how we can make that vision a reality. In the future, I hope that impact considerations will become part of all investments.

The 10 commandments of great Venture Capital investors

I know what you’re thinking – ‘Another list of ten commandments? But fear not, this isn’t your typical sermon from the mount.

I’ve been in the world of startups for 20 years and an investor for the past 10 years, but I don’t pretend to be an expert. In the world of startups and investing, we’re all just explorers, trying not to fall into the next hole in the ground. All we can do is keep ourselves informed, learn from our mistakes (and occasional successes) and remember it’s the journey, not the destination, that counts.

So, without further ado, I present to you the Ten Commandments of Being a Great Venture Capital Investor.

1. Thou Shalt Not Worship False Prophets (or Projections): Remember, every startup’s financial projections are a work of fiction. Look beyond the spreadsheet and into the team, the product, and the market.

2. Honor Thy Founder and Their Vision: Respect the founder’s vision and passion. They are the ones in the trenches every day. Your role is to support and guide, not to command.

3. Thou Shalt Not Take the Name of ‘Exit Strategy’ in Vain: Always have an eye on the exit, but don’t let it dictate every decision. Building a great company takes time.

4. Remember the Due Diligence, to Keep It Holy: Never skip your due diligence. It’s your best defense against bad investments and your best tool for finding the hidden gems.

5. Thou Shalt Not Covet Thy Neighbor’s Deal Flow: It’s easy to get envious of other VCs’ deals. Focus on building your own unique investment thesis and network.

6. Thou Shalt Not Bear False Witness Against Thy Portfolio: Be honest about the performance of your investments. Every portfolio has its winners and losers, and that’s okay.

7. Thou Shalt Not Kill…Time: Time kills all deals. Be decisive, move quickly, and don’t leave founders hanging. While it’s easier said than done, quick decision making can be a huge source of competitive advantage.

8. Thou shalt be patient. Venture capital investing is a long-term game. Don’t expect to get rich quick. It takes time to build a successful company. Be patient and help the company grow organically.

9. Thou Shalt Not Commit Adultery…With Shiny New Trends: Don’t get distracted by every shiny new trend. Stick to your areas of expertise and investment thesis. I’ve been guilty of this myself, but VCs have to be optimists by default.

10. Thou Shalt Love Thy Limited Partners as Thyself: Treat your LPs with respect and transparency. They are more than just a source of capital; they are your partners in this journey.

Bonus #11: Thou shalt invest in teams, not ideas. The best companies are built on strong teams. When you invest in a company, you are investing in the team that is building it. Make sure you have confidence in the team’s ability to execute on its vision since the idea is likely to change along the way.

My best piece of advice is never stop learning – stay humble, curious and hungry.

Exit mobile version