Every Company is an AI Company

I was on a panel the other week and I was asked a standard question: what do AI prices look like right now? My response: exactly like everything else. With every company now an “AI” company, there’s no longer a premium in the market around valuation, round size, or dilution. They just look like every other deal that we encounter. 

In fact, as we look at our pipeline for all of 2024, 60% of the companies that we saw had an explicit AI component to their businesses.* Now, this may be a bit of a chicken-and-egg scenario: in speaking with many founders, they feel that if they don’t include “AI” somewhere in the pitch they’ll be at a disadvantage given the current hype cycle we’re in around the technology. Regardless, it does have the effect of flooding the market with AI-labeled businesses and effectively lowering prices that we did see AI companies commanding about a year ago. 

At the same time, labeling companies as “AI”is an increasingly meaningless exercise. The best founders, and nearly every company in our portfolio is using AI in some capacity in their operations. The companies employing the technology best are hiring fewer engineers, operating overall with lower headcounts, and in general getting more done with less money.

This may be where companies (whether explicitly “AI” or not) will actually have the most impact on pricing in the future. As companies become more efficient, they come to the fundraising market from a position of strength. They require less capital - if they actually need to raise at all. We’ve seen strong companies that employ the tech the best in their internal operations have suffered just 15% dilution in their last fundraising rounds- typically half of what we’d expect to see at their stages. In other words, AI tech for internal operations will have the (potentially unintended) consequence of increasing investor competition for the best companies, as there is less pressure to raise in the first place and less of a need to take on excess capital. 

This is part of an underlying belief we have at Restive, which is that the seed round is poised to become the last opportunity to get meaningful ownership into the best companies. At this point, there is still a premium around operational risk and PMF risk being paid. Once those are addressed, the best companies have many more levers at their disposal to run their companies, and capital becomes less of a constraint as the mechanism to quickly grow. The best founders take advantage of this in their investor interactions. 

At some point in the not-so-distant future, we’ll stop tracking the metric of “AI company” as we analyze our pipeline. But in the meantime, ANY company has the ability to incorporate this efficiency mindset in their operations and get much more done with less. 

*An obvious caveat here is that at Restive Ventures we focus on early-stage fintech investments, and far and away most of the AI companies we see occupy the application layer. Within the broader market, premiums are still being paid, especially at the infrastructure level. 

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