Weekly Update: "The Age of AI Has Begun"
Highlights from SaaS & VC & Markets from the week of 3/20
Happy Saturday,
AI took center stage in tech news this week, although the banking crisis continues to generate ominous headlines. It was a busy week! In this edition of the Weekly Update, we’ll cover:
Market Update
Deal of the Week
Podcast Recommendation of the Week
Reading Recommendation of the Week
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I. Market Update: Banks Wobble, AI Rises
The markets were close to flat this past week, with the WCLD cloud index down 1%, closing at $27.68. Banking continues to be a source of worry as regionals like First Republic & PacWest have seen their share prices plunge 90% & 66% in the past month, respectively.
In a normal week, the Fed’s announcement to hike 25 basis points might have been the major news. Yet the arguably bigger news from Fed Chairman Powell’s press conference was his assurance to bank depositors everywhere that:
If bank deposits are secure, that means the worst of the banking crisis is behind us, right? I hope so. But New York Fed board member and commercial real estate executive Scott Rechler triggered widespread concerns about lurking systemic risks in the massive commercial real estate industry:
While there continue to be worrisome signs of economic risk, I think the most memorable news of this moment is the rapid, exponential improvements in AI. As Bill Gates put it in a recent essay, The Age of AI has Begun:
Soon the pre-AI period will seem as distant as the days when using a computer meant typing at a C:> prompt rather than tapping on a screen.
Gates mentions that he’s been meeting with AI’s most groundbreaking startup, OpenAI, since 2016. Time well spent! The burgeoning partnership with OpenAI has spurred the software giant to an early leadership position in enterprise AI.
Last week, Microsoft showed off how it’s infusing its Office applications with OpenAI’s latest AI technology:
AI-powered assistants called Copilots will be able to generate whole documents, emails and slide decks from knowledge the software has gained scanning corporate files and listening to conference calls. The technology will debut in the coming months, and Microsoft is already testing it with 20 companies, including eight in the Fortune 500 that it declined to name.
The demos are amazing. If you’ve used Excel before, this should blow your mind:
The pace of AI innovation today is stunning. Despite its massive size, no mature tech company is making faster progress than Microsoft.
The competitive intensity around AI is incredible. For example, on the day after Adobe made a major AI-related product announcement, its competitor Canva announced a slew of AI features:
I think the most impressive recent AI developments have come from OpenAI. Last week, they announced GPT-4, the next generation of its core technology, a “foundational” large language model (LLM). GPT-4 powers the ChatGPT chatbot, which hit 100m users in just 2 months — making it the fastest-growing Internet service ever. GPT-4 is also being offered as an Azure service by Microsoft, promising “GPT for every business.” Wow.
This week, OpenAI launched ChatGPT plug-ins, which allow the chatbot to browse the web and connect with third party databases & services. It will be rolled out slowly due to safety concerns, but it has groundbreaking potential:
This might be the birth of a major new platform. There’s a good chance that AI-powered chatbots become as ubiquitous as Internet search. ChatGPT is already consolidating its leadership position by leveraging third-party developers. This generation of AI-powered chatbots has the potential to be as impactful as any new technology since the advent of the Internet. Exciting times ahead!
II. Deal(s) of the Week: Pre-IPO Activity Continues
Beyond seed stage startup fundraising, tech deal-making continues to be slow. One area where there’s relatively more activity is pre-IPO, late stage startups. There are over 1200 unicorns, many of which require capital to grow. I would speculate that most of the unicorns also have early stage investors and/or employees interested in liquidity. There are many liquidity providers hunting for bargains.
Last week, the Stripe round was finalized at a $50b valuation, a big step down from its 2021 valuation of $95b. In contrast, SpaceX is rumored to be raising a large up-round. Buoyed by the success of its Starlink internet service, it’s targeting a $140b valuation, up from its $127b valuation last year.
III. Podcast Rec of the Week: Latent Space on ChatGPT’s “App Store Moment”
Many leading AI developers & startup operators have been wowed by OpenAI’s recent announcements. This podcast gives a great snapshot of these reactions. Its a new offshoot from the Latent Space Substack, which covers emerging trends in AI technology and business.
IV. Reading Rec of the Week: The Software Slog
This week, Buck on Software released a thought-provoking post on the state of the SaaS industry. Warning: it’s not optimistic:
I fear the software industry is settling into its own version of a slog: an extended period of low returns and slower growth where wealth creation feels hard.
I would agree that the easy money era in SaaS is over. This is how industries mature. Over time, it’s inevitable that investment returns regress to the mean. If an industry doesn’t have its version of “the good ol’ days,” it hasn’t experienced hyper-growth.
Overall, I’m not as pessimistic about the future of SaaS, but I think Buck offers a very insightful perspective: