Collin Groves – BDev Ventures

Beyond The Hype: How AI Will Disrupt Traditional Industries

Collin Groves — Tue, 21 May 2024 23:12:33 +0000

Artificial Intelligence (AI) has drawn the lion’s share of attention and investment in the venture capital landscape. In the first quarter of 2024 alone, AI startups secured over $11 billion in funding in the US, capturing almost 60% of all venture capital deployed with much of this attention focused on the AI tech stack – hardware, foundational models, infrastructure, and applications. This surge, up 40% from the previous year, makes it tempting for any startup or future founder to claim an AI focus.

However, it’s challenging for the human mind to grasp the rapid advancements enabled by Moore’s law that have led to where we are today. Unlike the transition from 8-bit to 16-bit computing, marked by the transition to graphical interfaces, the pace of progress in AI technology is so staggering that only a few rare experts truly understand the nuances between, for example, Nvidia’s S100 and A100 chips, which power much of this innovation. Two years ago, startups were disrupting incumbents in late-stage or public markets. Today, startups are disrupting other startups founded just a month or two ago, creating a sense of FOMO mixed with uncertainty for both founders and investors.

In other words, focusing on core AI may not be the solution for every founder. Instead, amidst this AI-driven fervor, these digital advancements have revealed key tailwinds that the other 40% of venture funding can leverage:

Standardization Across LLMs: As large language models (LLMs) continually improve and standardize, proprietary data used to train models localized or edge models becomes the key differentiator.

Speed of Solution Development: The rapid development and deployment of solutions allow founders to cheaply and quickly build high-quality solutions for more niche problems. The driver of success will be distribution and the founder’s ability to gain market traction. During that scaling, partnering with the customers to define their next problem set will build the product roadmap for the founders.

There are substantially sized, occasionally overlooked sectors that operate in the real, physical world that have opportunities today that are fit to benefit from these tailwinds in the near term. Founders are especially well-positioned to utilize the technological advancements we are seeing developed at unprecedented speed because there is a level of nimbleness that startups bring to these industries that incumbents haven’t historically operated with.

Logistics: The application of AI in logistics is transforming the industry by optimizing routing, inventory management, and delivery processes. AI-powered predictive analytics can forecast supply chain disruptions, allowing companies to mitigate risks proactively. Additionally, AI-driven autonomous vehicles and drones are beginning to reshape last-mile delivery, promising to significantly reduce costs and improve service efficiency. Startups have a golden opportunity to develop AI solutions that enhance supply chain visibility and responsiveness, which are critical in today’s fast-paced market environment.

Real Estate: AI is enabling smarter market analysis, property management, and customer service. Machine learning algorithms can analyze vast amounts of proprietary and public data to identify investment opportunities and predict market trends with greater accuracy. AI can also automate routine tasks, such as tenant screening and property listings, and enhance the user experience through personalized recommendations and virtual property tours. Furthermore, real estate transactions, which rely heavily on documentation, brokers, and third-party services, can be streamlined significantly. In the case of brokers, luxury and high-end aspects will still require human touch but margins can be benefited by new waves of automation.

Energy: The energy sector stands to benefit immensely from AI, particularly in optimizing grid management and facilitating the shift to renewable energy sources. AI can help predict energy demand patterns and integrate diverse energy sources more efficiently into the grid. Moreover, AI solutions can monitor and adjust the energy output of renewable sources in real time to maximize efficiency and minimize waste. Startups can leverage AI to develop smart grids, energy management systems for homes and businesses, emissions and leaks monitoring, and predictive maintenance tools for energy infrastructure.

Manufacturing: AI is revolutionizing manufacturing through smart automation, quality control, and supply chain management. Advanced machine learning models can predict equipment failures and schedule maintenance to avoid downtime. AI-driven robotics are increasingly used for tasks that require precision and reliability, improving production efficiency and worker safety. Startups have significant opportunities to create AI tools that help manufacturers optimize production processes, reduce costs, and enhance product quality. Track and trace technology will see leaps in advancements with AI, allowing for more granular measurement of compounds and alloys, for example.

In essence, while AI undeniably dominates the technological discourse, it’s not the only path to success. There’s significant potential for founders who look beyond the digital landscape to the tangible, physical challenges industries face today. By focusing on these real-world problems, startups can explore a less crowded but potentially more rewarding opportunity space, particularly when they can apply these digital proliferations with practical solutions that customers are willing to pay for today. Let’s not forget that 46% of the annual revenue from S&P 500 companies last year came from companies in these four sectors. AI and Big Tech are grabbing the headlines today, but don’t overlook what’s happening on each side of this connected, digital and physical ecosystem.

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Unveiling the 4 Archetypes of Minority Investors

Collin Groves — Sat, 19 Aug 2023 08:00:52 +0000

In the vast realm of venture capital, much has been expounded on the qualities of lead investors that founders should actively seek. These influential figures, who exchange capital for significant stakes and potentially board influence, should offer strategic alignment, vital expertise, and valuable industry connections. However, let’s shift the focus momentarily to the often-overlooked minority investors—the key players that fill out a round or the cap table before a startup is ready for a full-blown fundraise. Whether they are friends, family, angels, or venture capitalists, these unsung heroes can be categorized into four distinguishable archetypes. As founders, it is crucial to weigh the risks and rewards that come with each archetype when shaping your cap table.

1. The Ghosters: Silent Benefactors

In the realm of minority investors, we encounter the enigmatic figures known as “The Ghosts.” These investors make their presence felt by writing a check, only to vanish into the shadows. Their motivations may range from being investment novices seeking market education to biding their time for more active involvement, or perhaps they simply lack the bandwidth at the moment. Nevertheless, we welcome these spectators onto a cap table. While they may not bring immediate value beyond their financial contribution, they also do not consume the precious time of the founder. As long as the investor’s long-term ambitions align with the startups’ and they meet the minimum check size, these silent benefactors tend to leave a net positive impact.

2. The Promisers: Beware of Smoke and Mirrors

Ah, “The Promisers.” Every founder has encountered this archetype—an investor who talks a big game but falls short on delivering tangible results. Their modus operandi revolves around empty promises of coveted connections, introductions to influential networks, and grand future plans. However, they rarely live up to their lofty claims. Instead, they may burden founders with irrelevant queries, incessant demands for face time, and last-minute requests for favors granted to larger investors. Beware of these illusionists and their mesmerizing allure. Relying on their promises can lead to headaches and wasted resources.

3. The Drivers: Operational Partners Extraordinaire

Enter “The Drivers.” These investors go beyond their financial contribution, becoming integral parts of our entrepreneurial journey. They immerse themselves in the trenches, fighting alongside the team. Drivers possess the unique ability to propel top-line growth, bolster balance sheets, and fill critical gaps within organizations. The level of interaction with these investors won’t rival that of lead investors, but the rewards are still substantial when the right partnership is in place. Founders must exercise discernment early on when a minority investor has this reputation as time is a finite resource. Be selective and ensure alignment with your lead investor—leads are strategic partners, while Drivers should be operational partners.

4. The Mavericks: Extraordinary Rarities of Fortune

Have you ever caught a glimpse of the Northern Lights or the Trevi Fountain without spectators? Few have. And in the entrepreneurial world, the equivalent of happening on this level of rare event is finding a Maverick. It’s not that these elusive investors don’t exist; rather, encountering them requires the perfect confluence of circumstances and timing. These exceptional people reveal their true form when we least expect it. Picture this: during a quarterly update, a request for a COO emerges, and a silent investor, who had remained dormant for a year, swiftly introduces leadership to a seasoned operator with an impressive exit under their belt. Alternatively, when the market turns, and the startup urgently requires a bridge loan to meet payroll, this investor steps forward without hesitation, offering favorable terms. Don’t expect all investors to possess these maverick-like qualities. Instead, be astounded when they reveal their extraordinary powers.

Now, the million-dollar question: How do we discern an investor’s archetype? There are two tried-and-true strategies: conducting reference checks and requiring investors to demonstrate their value before accepting their investment. These approaches help founders evaluate an investor’s track record, reputation, and potential contributions. Unlike lead investors, who are limited in number, founders may have numerous minority investors. This amplifies both the risks and rewards associated with these investors. Therefore, it is crucial to invest extra time upfront to ensure that investors with smaller stakes can potentially bring the exponential rewards to the company rather than growing into the exponential risks.

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Cap Tables: The Provenance of Diligence

Collin Groves — Tue, 05 Dec 2023 17:36:26 +0000

So, you’ve aced the investor screening call – the gateway to the world of diligence. Amidst the various facets of scrutiny, one cornerstone of all diligence stands tall: The Capitalization Table, or as we in the startup realm fondly call it, the Cap Table. But before we get into why it’s so important and how it’s used, let’s align on what it is.

What is a Cap Table?

A Cap Table breaks down the equity holders in the startup (private company). It will also showcase the number of shares each party owns, and the corresponding percentage of ownership. There are three different levels of detail that a Cap Table may come in:

A basic Cap Table will break down who the common and preferred equity holders are.
A detailed Cap Table will build upon the basic version and layer in the founder shares, employee stock option plan shares, and investors by round in which they invested.
In addition to those aspects, a full Cap Table will include prior iterations of financing, the number of shares employees and warrants have vested and exercised, and details of important terms and side letters footnoted.

That seems like quite a bit to constantly track, doesn’t it? The good news is that Cap Tables don’t change that often. The bad news is that a mistake on the Cap Table is a giant red flag for investors because this document directly ties to how much capital everyone’s equity is worth.

How are Cap Tables used?

Investors and lawyers can use cap tables to review funding history, determine the number of shares that will need to be created as a part of a round, or even scenario model an anticipated outcome (a waterfall analysis). There are multiple tactical uses of a cap table.

If an investor is looking at a Cap Table, they are considering investing, and that investment will change the numerical values on the Cap Table (almost every time). Good founders will plan out their Cap Table keeping dilution simulations in mind, but great founders will treat this like an art piece they are creating, keeping in mind that each brush stroke leads to an image that ultimately will be perceived with opinion and scrutiny.

Why are Cap Tables important?

Beyond those tactical reasons, the paintbrush strokes start to tell the story of the Cap Table over time – a story of greed and power or optimism and fear. Do you remember the scene in ‘The Social Network’ when the CFO’s shares get diluted down to 0.03% before being escorted out of their new headquarters? Now that is a Cap Table story we hope to not repeat.

That is a good example, however, of how investors will be using this document to determine which type of story this startup is, by analyzing how much equity the lead investor took, how much equity the founders have given away, who has followed on in multiple rounds, how many investors it took to raise a round, or whether there was bridge financing or not. All of these are signals that feed into the tale of how this startup has made it this far and how it will continue its journey to unicorn status.

The art world has Sotheby’s, Art Institutions, and historians to meticulously track the history of a piece of art. That history is called the Provenance. It is almost as important as the actual piece of art. It legitimizes the piece while also walking viewers and owners through that piece’s journey throughout history. The Cap Table is the provenance of the startup. The names and values on that Cap Table indicate how the startup has changed hands and been nurtured over time. It can tell if the startup is a fraud or a potential hidden gem. It showcases the type of founders and investors they will be aligning themselves with for years to come.

Unlike the art world, startups won’t be hiring historians to document their future biopics from the onset. Instead, a startup has a few other resources at its disposal that we highly recommend. First, get a lawyer to come through the investment documents and create the first version of the Cap Table. This step isn’t necessary any longer, but it’s always a good idea to have your lawyer on board. Once that first version is validated, move it over to software that your investors can view on their own time; Carta and Pulley are two of the market leaders. Most VC funds will have portfolio benefits to get you a discount if you haven’t migrated over to an equity management solution yet. These solutions can mitigate numerous headaches you will have if your Cap Table is incorrect, kept on a messy spreadsheet, or if you get asked to create a fully diluted or pro-forma Cap Table in the future (more on that to come in later posts!).

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