Blog post: Key takeaways from the Air Street Summit: Investing in AI

In this post, we share key takeaways from our Air Street Summit 2019 on AI-first startup investing, product building, selling companies, and investing in VC funds. If you’re a GP, angel, or LP and you’d like to join us next year, drop us a line!

The AI-first startup investing playbook

AI is a hot topic amongst investors across the capital spectrum. By some counts, over 3.6k “AI startups” in 70+ countries have raised $66B since 2013. The pace is picking up too: $7.4B was raised in Q2 2019 alone. In an environment like this one, it’s important for investors to carefully select signal from noise using an experience playbook (e.g. metrics, frameworks, benchmarks). Just like today’s well-established technology themes such as SaaS, we believe that the AI-first theme will follow a similar trajectory where investors experiment and acquire experience over the years. Through (more) success and (less) failure, this ultimately culminates in a best practice “AI investing playbook”.

Air Street Capital is a venture firm focused on AI-first technology and life science companies. By virtue of our industry and academic roots, Operating Partnership, and existing community efforts (e.g. RAAIS, London.AI), we consider ourselves as natives to the AI community. We believe that the best investors in AI-first technology companies will be those who are “close to the metal” when it comes to understanding technology-problem fit and the particularities around how to build, market, sell, and scale AI-first products in various markets.

As a result of our position in the market, we decided to run an experiment by hosting a half-day knowledge-sharing forum for VC General Partners (GPs), Limited Partners (LPs), and the angels who are investing in AI-first technology and life science companies. Our goal? To share knowledge around the emerging AI-first startup investing playbook and strengthen a collegial investing community around this theme.

To help us achieve this goal, we brought together friends across the industry to discuss:

  • Investing: Best practices for AI-first startup investing, a conversation between Zavain Dar (Lux Capital) and Nathan Benaich (Air Street Capital).
  • Building: Learnings from the front lines of creating and selling AI-first products, a talk by Julien Cornebise (Air Street Capital, ex-DeepMind).
  • Exiting: Current dynamics in the M&A market, a talk by Peter Spofforth (Qatalyst Partners).
  • LPs: Market insights into VC fund investing and liquidity, a talk by Nina Kraus (Hamilton Lane).

  • Air Street Summit attendees

    We hosted 45 of the industry’s best GPs, LPs, and angels from the following firms:

    Key takeaways

    We covered a lot of ground, from investing through the building and selling of products and companies to investing in VC funds. Here is a snapshot of the key takeaways:

    GP investing

  • ML expertise on the (founding) team is important for creating the initial edge of the business. This confers an advantage over competitors while the technology potentially commoditizes.
  • Deepening the technical talent bench is equally important to keep the “innovation wheel” spinning so this advantage can compound over time as the business grows its brand, its understanding of the problem, and high-quality data.
  • We’re looking to invest in the dogged commercial entrepreneur and technologist/scientist from whom technical edge arises. This can be in one or more people on the founding team. If you have one or the other, tread at your own risk.
  • When investing ahead of the curve (e.g. further on the deep tech spectrum), it is normal that companies might not have a defined customer persona or buyer budget yet. Where possible, companies should try and map to “traditional” persona/budgets as they enter Series B+ land if they have a defined incumbent peer group. Later stage investors tend to be less technology-driven and more metrics-driven.
  • Bio + AI investing is hot and there is a lot of value to be created. More on this here ;-)

  • M&A deals

  • Although the return on investment proof points for AI-first software products might take longer than traditional SaaS products, when they reach scale, their ACVs can be larger than incumbents. 2017 seems like a breakpoint for vertical AI-first companies vs. tools/generic platform providers in terms of their momentum.
  • We see many more $50M growth cheques written into AI-first companies in 2018/2019. This is a sign of company maturity because growth investors invest when they can see dollars in = more dollars out. AI-first companies are real businesses. Customers and buyers see beyond the AI technology and into the business ROI.
  • Buyers need to understand what they’re buying.
  • We see a maturation in the acquisition valuation metrics from $/engineer (close to peak hype) towards traditional business metrics (revenue multiples, profitability).
  • There are fewer smaller acquisitions in AI now due to the prior cohort of venture-funded companies closing at high private valuations. Buyers are, however, still open to tag on acquisitions of talented teams.

  • LP investing

  • Measured by pooled IRR by vintage year, the VC asset class has topped the charts from 2010 through 2015.
  • Top quartile venture returns beat private equity pooled IRR from 2006 through to 2018.
  • Strong returns have led to an increase in global VC fundraising. Almost $200B was raised globally in each of 2017 and 2018 (including SoftBank). Without SoftBank, the numbers become ~$50M and ~$100M, respectively.
  • While North America, particularly Silicon Valley, has historically been the primary hub for venture capital managers and deal flow, globally diversified VCs have gained market share in recent years as regional start-up ecosystems continue to grow. Europe’s share of VC and growth fundraising (including SoftBank), grew from 5% in 2014 to 13% in 2018. In the same time period, North America’s share decreased from 49% to 39%.
  • Distributions have fallen to historic lows over the last 10 years as the age of companies at IPO and the broader availability of capital for venture-backed businesses increases. On average, the annual distribution rate of VC and growth companies sits at 23.2%.
  • Thanks for reading! Drop us a line if you'd like to attend next year's Air Street Summit

    Huge thanks to Zavain Dar, Julien Cornebise, Nina Kraus, and Peter Spofforth for sharing their experience. Thanks to Cooley LLP for hosting us.