Full Ratchet: 161. Why SaaS is not a fit for VC and How AI Compounds Competitive Advantage (Ash Fontana)

Podcast Notes Key Takeaways

Most VC firms are not “focused funds” – they’re more general (they invest in a wide range of companies across many different fields). This is different from Zetta – they only invest in AI & machine learning companies.
- Focused funds get a 16% higher multiple on invested capital and a 33% higher ROI compared to generalist funds
The 4 Phases of AI:
- Phase 1 (low risk): AI applied to consumer applications
  - Ex. – Google and Amazon giving recommendations
- Phase 2 (slightly higher risk): AI applied to enterprise SaaS companies
  - Ex. – CRMs suggesting leads
- Phase 3 (high financial risk): AI-centric applications that completely replace a workflow
  - Ex. – Using AI tech to estimate damage on a car, computer vision in autonomous cars, etc.
  - We are currently in Phase 3
  - The key metric for phase 3 AI: Is the efficacy better than a human?
- Phase 4: (very high financial risk): Applications we haven’t considered before
  - Ex. – Using AI to optimize data center use or energy flow across an electricity grid, making medical diagnoses, etc.
- Note – In many cases, even if an AI tech has better efficacy than it’s human counterpart, it will still incur adoption risk. Many people are not ready to trust AI as a total replacement for human judgment.
AI itself shouldn’t be feared. However, AI can create monopolistic power held by a few companies– this is something to be concerned about.

Ash Fontana of Zetta Venture Partners joins Nick to discuss Why SaaS is not a fit for VC and How AI Compounds Competitive Advantage. In this episode, we cover:

Categories of AI that Ash is most interested in
The difference between real AI and AI-enabled companies
Why SaaS will cease to be investable by VCs
The current AI stage of adoption
How he times the market
The four phases of AI
What phase of AI they invest in
How AI is and will be affected by limited data
How startups can compete for talent w/ GAFA (Google, Amazon, Facebook, Apple)
The moats being created by their AI-first portcos
How they think about metrics and milestones for AI-backed companies
If AI should be feared
and finally we wrap up w/ Ash's thoughts on Chris Dixon's position that we will see a movement from centralization back to decentralization in tech-- and the role that AI will play

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Podcast Notes Key Takeaways

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