How AI is Changing the Software Value Chain: Insights from Index Ventures
Plus: AI Sparks Debate Among Industry Leaders & Venture Capital Activity in Q1 2023
Good morning, recurring revenue lovers,
These days, it's almost impossible to talk about software without mentioning AI, right?
But I hope you're not bored of it, because I have some exciting content for you today.
Let's dive in.
🍿 Quick Snack
💣 Index Ventures explains how AI is changing the software value chain and which business models you should be looking out for.
✋ Industry leaders call for a six-month "pause" on large-scale AI development in order to plan and manage the risks of AI systems with human-competitive intelligence.
🦄 Q1 2023 saw a dip in venture capital investment and deal volume in software industry, but OpenView Venture Partners secured $570M for its seventh fund to invest in high-growth software startups.
🍟 Extra Fries: a UK accelerator teaches women how to build B2B software companies, and Twitter investigates a code leak.
+ Select M&A/Funding Activity
🍔 The Full Meal
The Software Value Chain is Changing: How AI is Ushering in a New Era of Business Models
Index Ventures is looking at AI as one of their most important investment areas as they believe that within a decade, AI will be a core component of every application software built and shipped. Here are some of their predictions:
The adoption of AI will change the software value chain, leading to the emergence of new business models like the rise of cloud computing did.
The Foundation Layer: A new class of companies will specialize in maintaining the latest up-to-date foundation models based on the most cutting-edge research.
The value of these companies will come from their massive scale, as it is expensive and requires deep knowledge to train and administer large models.
The Infrastructure Layer: A new type of managed infrastructure company could emerge, helping software companies provide hyper-personalization on top of foundational model providers.
The complexity of fine-tuning at scale, along with generating, managing, and administering large volumes of data and models, creates opportunities for a new generation of infrastructure providers similar to the rise of database providers in recent decades.
Examples of companies they have invested in for this category include:
Scale AI: The company enables the development of AI applications by assisting machine learning teams in generating high-quality ground truth data. Their LiDAR, image, video, and NLP annotation APIs allow machine learning teams at companies such as OpenAI, Lyft, Pinterest, and Airbnb to concentrate on building distinguished models rather than labeling data.
Humanloop: the company assists developers in building high-performing applications using large language models like GPT-3. Its platform can be used to experiment with new prompts, collect model-generated data and user feedback, and fine-tune models for better performance while optimizing costs.
The Application Layer: Business models at the application layer will shift to capture more customer-specific value unlocked by AI, enabling customers to pay based on the level of customization or personalization within the product.
These AI-native companies will be able to build a competitive advantage and capture value that grows over time. As customers put more of their own data into the product, the AI is able to improve in ways that are highly specific to them, further enhancing the value of the product.
Examples of companies they have invested in for this category include:
Gong: the company helps revenue teams reach their full potential by revealing their customers' reality. Its patented Gong Revenue Intelligence Platform captures and comprehends every customer interaction, delivering insights at scale.
Deepscribe: an AI-powered scribe that captures the natural conversation between clinicians and patients, and automatically generates medical documentation. This allows clinicians to focus on patient care instead of note-taking.
⚡️ Final Words: The fundamental premise of investing in AI companies remains centered on creating exceptional products that deliver value to their customers. However, there will likely be significant experimentation with business models as the space is still in its infancy.
AI's Potential Dangers and Benefits Spark Fierce Debate Among Industry Leaders
Elon Musk, Steve Wozniak, Yoshua Bengio, Gary Marcus, and other AI experts, researchers, and industry leaders have signed an open letter calling for a six-month "pause" on large-scale AI development beyond OpenAI's GPT-4.
Supporters of the letter argue that:
AI systems with human-competitive intelligence can pose risks to society and should be planned and managed with care and resources.
Recent months have seen AI labs in a race to develop and deploy ever more powerful digital minds that no one can understand, predict, or reliably control.Powerful AI systems should be developed only once we are confident that their effects will be positive and their risks will be manageable.
AI labs to immediately pause for at least 6 months the training of AI systems more powerful than GPT-4.
AI labs and independent experts should use this pause to jointly develop and implement a set of shared safety protocols for advanced AI design and development that are rigorously audited and overseen by independent outside experts.
AI labs to immediately pause for at least 6 months the training of AI systems more powerful than GPT-4 to jointly develop and implement a set of shared safety protocols for advanced AI design and development that are rigorously audited and overseen by independent outside experts.
Critics of the letter argue that:
The letter further fuels AI hype and makes it harder to tackle real, already occurring AI harms.
That it fosters unhelpful alarm around hypothetical dangers, leading to misinformation and disinformation about actual, real-world concerns
That it underplays current efforts towards global AI regulation and legislation. (e.g. Europe’s AI Act)
This open letter — ironically but unsurprisingly — further fuels AI hype and makes it harder to tackle real, already occurring AI harms. I suspect that it will benefit the companies that it is supposed to regulate, and not society. Let’s break it down. 🧵futureoflife.org/open-letter/pa…
— Arvind Narayanan (@random_walker)
Mar 29, 2023
Venture Capital Activity in the Software Industry for Q1 2023
Pitchbook's Q1 2023 venture data shows that venture activity has declined compared to 2022, with a 55% decline in total capital invested and a 53% decline in deal volume.
In their Q1 2023 Quantitative Perspectives report, we can observe a significant imbalance in capital supply and demand for software companies, especially in the late stage.
But it’s not all bad news for companies out there. OpenView Venture Partners has closed on $570 million in capital commitments for its seventh fund (25% larger than its sixth fund of $450 million).
OpenView will continue to focus its investments on “high-growth software startups,” investing globally across business software categories including infrastructure, applications, cybersecurity and vertical software.
The firm looks for companies that have between $1 million and $10 million in annual recurring revenue.
OpenView invested in 16 companies with its sixth fund and expects with its seventh fund — being 25% bigger — it could invest in up to 20 companies over the next few years.
OpenView's first investment in Fund VII is in Rewst, which is doing robotic process automation for the managed service provider sector.
🍟 Extra Fries
🔎 Find of the week. Finout is a Tel Aviv-based startup that provides a SaaS service to help businesses manage their cloud spending. The software provides a single bill totalling all cloud spend, which can be analyzed through a customizable dashboard. (Read More)
🔥 Watch out, more founders incoming. AlbionVC and Speedinvest have launched an eight-week accelerator program for female operators with ideas that could turn into new B2B software companies in the next 12 months. The program, named Radia Accelerator, is open to UK-based female operators and will teach them how to start, build, and scale a B2B software company. (Read More)
🐣 Who let the bird out? Parts of Twitter's source code were leaked on GitHub, including "proprietary source code for Twitter's platform and internal tools." Twitter has filed a DMCA request and a court filing in California to try to find the person responsible for the leak and obtain information on any other GitHub users who may have downloaded the data. Twitter executives suspect that an employee who left the company last year may be responsible for the leak. (Read More)
🖤 M&A Transactions
💸 Funding Rounds
German package recycling start-up Recyda has raised €1.75m to expand into new international markets and develop its platform. The company's software is designed to help businesses and brands assess the recyclability of their packaging based on international regulations. (Read More)
Orb, a pricing platform that helps companies automate various billing types, has raised a $14 million Series A round. The platform can schedule future price changes and lets companies directly embed draft invoices into product billing portals. (Read More)
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