Image Source: Generated by Unbounded AI The opportunities presented by AI are far greater than all the opportunities facing the technology industry, but this requires a change of mindset on the part of startups. They no longer seek to disrupt and destroy established companies, but to transform them, because startups are in many At a disadvantage in all aspects. Successful application of AI requires two things: large amounts of data and expensive computing power. Big companies have both of those things.

For more than thirty years, the stars of Silicon Valley have shone brightly. American entrepreneurs are creating new digital businesses that are disrupting one sector of the economy after another. These start-ups are hugely profitable, spawning vast new wealth and a new generation of giants.

But such times have passed. New forces are eroding the roles that startups once played. AI is now dominated by large companies such as Microsoft, Google, Meta, and NVIDIA. The new situation of globalization, the return of geopolitics, the completion of digitalization, and the rise of AI have tilted the balance back towards established companies. This doesn’t mean that startups don’t have opportunities; rather, they and their investors must change their understanding of their roles. The goal in the past was disruption; now the goal must be transformation.

In the first era of Internet-driven innovation, the "dot com" boom, companies thrived primarily by moving services such as shopping online. Although the first boom ultimately failed, the digital infrastructure it created continued to expand. As it expands, entrepreneurs are able to launch digital-first businesses: new banks, insurance companies, travel companies and medical providers. Meanwhile, other innovators, such as cloud computing startup Snowflake and Datadog, are launching companies designed to keep traditional businesses competitive in the new digital reality.

The reason start-ups can truly disrupt an industry is because they unleash both software advantages and business model advantages. Category-defining companies like Airbnb (a General Catalyst investment), Uber, and DoorDash are revolutionizing the way people actually use services by providing new digital interfaces. But other industries have not been fundamentally affected: The innovations of the past 30 years, for example, have produced no real competitors for J.P. Morgan or U.S. insurance company State Farm. In fact, in many industries, established companies will only become stronger in the digital age, immune to the disruption brought about by Silicon Valley. Still, there were enough disruptors for venture capital to reap extraordinary returns.

It is not only American ingenuity that is driving this era, but broader global trends are also adding fuel to the fire. In the mid-2000s, the true digital consumer was born, and the “rise of the other” created the rise of the global middle class. The global boom of Facebook and smartphones is testament to this phenomenon. Globalization has also reached its peak here, with global tariffs ending a long decline and falling to historic lowspoint. In this era, entrepreneurs have adopted a "post-historical" and "post-geographical" thinking. Thanks to global supply chains, widespread online access and affordable cloud computing, they can deliver digital services to consumers in every country and every industry.

Venture capitalists have identified a winning strategy: as long as the company has a product that the market needs, its goal is to quickly gain market share and become the dominant player in a specific category. So over the past two decades, the mantra "move fast and break things" has become popular not only in emerging industries like social media, but also in traditional industries like health care, creating a massive financial and social impact. turmoil.

When the Great Recession hit, startups were helped more than hurt. While startups, like other industries, took an immediate hit, they also benefited greatly as the Federal Reserve increased the money supply, driving a new era of cheap capital. (From 2010 to 2014, funding in the venture capital industry more than doubled). Similarly, the COVID-19 pandemic has spurred the growth of startups. That's not just because more daily life has moved online, but also because investors have rushed to close new deals to take advantage of the U.S. government's stimulus package, with infusions of new capital pushing stocks to new highs and expanding the amount of money available.

However, the most important impact of the epidemic is that it has brought to the surface the anti-globalization fever that has been growing for many years. In 2020, tariffs rose again under the Trump administration. According to World Bank statistics, countries have signed 60% fewer trade agreements than they did 20 years ago. The epidemic has also exposed the inherent risks of globalization: countries without the ability to produce vaccines or masks will be left behind.

These geopolitical headwinds will hurt startups more than established companies. First, governments will turn to stalwarts rather than start-ups as they seek to secure supply chains. Consider the companies that stand to gain the most from the CHIP and Science Act: The bill provides $52.7 billion in subsidies for semiconductor R&D and production, and it’s not the little-known new entrants that are getting the money. Instead, they are established companies that can guarantee stable supply: TSMC, Samsung, Micron Technology and Intel.

On the other hand, geopolitical changes have also brought about new policies. In the past, companies were able to thrive in a relatively free environment. Uber, for example, largely decided to ignore regulations governing the taxi industry in the hope that its service would become popular and the law would eventually catch up. But over the past few years, new trade restrictions, U.S. domestic subsidies and privacy laws have sprung up that companies must comply with or seek changes to. And the ones that are best at doing this are the big, established companies. Amazon and Meta each spent nearly $20 million on U.S. lobbying last year, well beyond the reach of any startup.

To make matters more troubling, digital start-ups must also face the problem of market saturation. now westMost people in the country are digital consumers, and most companies have digitized almost all processes. Especially after the epidemic, more than 90% of companies have adopted cloud computing.

How AI is fundamentally changing startups

However, just As this technology trend comes to an end, a new, more disruptive trend has arrived: the rise of AI. For the first time since the advent of the Internet, CEOs from all countries and industries are trying their best to adopt a technology at the same time. This time the ambitions and hopes are higher. AI can not only transform existing processes from one area to another, as digitalization did before it, but it can also learn autonomously.

This key distinction means that the productivity gains we can expect are not a one-time "step change" but a "slope change" of continuous improvement. At its core, AI is a workforce-changing technology that will unleash human productivity by creating a parallel labor pool that can take on many jobs that humans are unwilling to do. AI will exert deflationary pressure on the entire economy by increasing the supply of labor in caregiving, tutoring, maintenance, etc.

The opportunities brought by AI are far greater than all the opportunities facing the technology industry, but this requires Silicon Valley startups to change their mindset and no longer seek to disrupt and destroy established companies, but to transform them, because startups At a disadvantage in many ways. Successful application of AI requires two things: large amounts of data and expensive computing power. Big companies have both: the data to build models, the money to pay for all the computing power needed to analyze that data, and the customer relationships to make these costly endeavors immediately profitable.

Take code generation, the core task of all software engineering, as an example. The first company to use AI to dominate the field was not a start-up but Microsoft, a 49-year-old company with a market capitalization of $3 trillion. Its GitHub Copilot is the most popular artificial intelligence code automatic generation tool, with more than 1.8 million paying users.

Of course, the AI ​​​​race will not necessarily be a winner-take-all, and brave and capable startups can still have a place. In fact, many promising startups are solving the code generation problem. However, it will be more difficult to surpass the big players in terms of technical quality, data volume and resources.

Still, there is still plenty of room for startups to grow as the demand for innovation reaches new heights. Their new opportunity lies in eventually providing services themselves, rather than just assisting other companies in their work. For years, Silicon Valley has been obsessed with bringing the efficiency of software into every business activity, such as creating digital interfaces for restaurant ordering. But in the AI ​​era, software is not just a service intermediary, but the service itself.

Think of a customer service center. In the past, startups just sold software to large companies that call center workers used. With AI, call center startups themselves can provide services, namely chatbots that talk to customers. This is unfamiliar territory for software startups, as they are used to operating with relatively few assets and enjoying profit margins of up to 80%, compared with much lower margins in the services industry.

However, AI will help close the margin gap, and the potential market size for startups to make this shift is actually several times greater, because they can maintain the core position of technology companies while , leading the company to launch an impact on the entire value chain. In fact, although the technology industry is prosperous and has a large say in the United States, it only accounts for about one-tenth of U.S. GDP. This share could grow significantly if tech entrepreneurs can seize new opportunities and provide services rather than just shape workflows.

How can American entrepreneurs take advantage of the new advantages of startups? Startups must work more closely with established players if they want to gain access to the data, expertise and customers of incumbents. They must also develop a new understanding of providing services, even if they are digital or provided by AI agents. This means developing new pricing models, providing customer support, and designing products for end users rather than businesses acting as intermediaries.

Perhaps most importantly, they must embed responsible innovation at the heart of their work and constantly think about the impact their technologies will have on the workers in the industries they transform. If artificial intelligence replaces 25% of a person’s job, what will happen to the newly released surplus labor? In health care, for example, nurses can use this extra time to switch from reactive to proactive care, thereby reducing the likelihood that patients will subsequently become ill. However, achieving this transformation requires strong leaders willing to invest in strategic decisions. It may seem better in the short term to lay off employees, but succumbing to this temptation will lead to long-term losses: the company that ultimately wins will be the company that reinvests talent into higher-value activities.

Startups still have many advantages that big companies covet: They attract talent who want to take risks, move quickly and innovate, and can adapt to their environment. These characteristics will serve them well as they transition from one era of innovation to the next, despite new headwinds.