LP Update: Navigating AI, VC, Fundraising Today

I am sharing part of our LP update that you might find useful if you are a founder navigating the current fundraising environment.

Since our fund has always focused on data and AI we dedicate some time discussing AI trends and fundraising in this AI-first world.

**We invest upto $1.5m in preseed AI/data companies. ** Reach out to us at arraydeals@array.vc if you are starting a company.

AI Update:

Companies in the AI category are either infrastructure (tools, models, etc.) or applications (such as health, finance, legal, etc.). Some other hot companies in these categories that just keep raising in the last few months (some even multiple times): Stability AI, Jasper, Hugging Face, OpenAI, Midjourney, Character.ai, Anthropic, Clari, Weights and Biases, Synthesia, Harvey, Replit, Runway, LangChain. and many others. This Forbes 50 AI list is a good start. Here is a good visual way to see the company broken down by categories. 

Large companies are also trying to be part of this AI story now especially as you might have been reading about Microsoft (OpenAI), Google (Bard), and now Amazon’s latest news with Bedrock. More will definitely come.

These advances in AI are happening really fast. Autonomous agents like Auto-GPT and BabyAGI are demonstrating the race to get ahead in AI is just getting faster. While the results can be inconsistent there is still a lot of work to be done here and new areas ripe for innovation/investment. The announcements about ChatGPT4 were literally on that first Monday after the SVB weekend leaving no time to catch a breath. The influx of deals, working with existing companies on taking advantage of the power of ChatGPT, and thinking about the new opportunities to invest in have certainly kept me busy. 

Travel has picked up and so has the number of events and hackathons. While my last 2 investments are not in the bay area (they are in Europe and Seattle) it is still the place founders want to move to / visit to build their AI company. I was at an Hugging Face AI event at the Exploratorium in SF with 5k people a few weeks ago! They were calling it the “Woodstock of AI”.

Pre-Seed Market Trends:

1)   Fundraising at pre-seed is still very heated for pre-seed in all the areas we invest in - AI/Data/Infra. If you want a general primer on the AI/ML/GenAI trends today here is a good article that can give you a good background.

2)   Valuations and round sizes should have come down but they haven't. Deals and the deal speed have still not slowed down. Deals are still oversubscribed in days. There was a short window in Q4 where it seemed like the pace was slowing down but it picked up again in Q1. Average valuations from what I am seeing for a mediocre team has gotten even worse than previous years.

3)   There has been a growing trend of solo founders who want to raise and grow their team after the raise. 

4)   Many undifferentiated companies are being created just on OpenAI but are still getting funded if it is a good team or sometimes by just a group of syndicate investors. It would be wise to say everyone is figuring it out.

Follow-on rounds:

True (priced) follow-on rounds are very rare unless you are one of the hot companies in the categories such at AI and then every firm wants to pile money in these companies. You might be seeing a lot of buzz in any companies in the AI space across all stages.

While some of our companies are raising priced follow-on rounds what is more common these days is companies are raising many millions on just SAFE in follow-on rounds. We generally do not mark up these SAFE rounds. Over half of our active portfolio companies have raised follow-on capital in SAFEs to increase runway. Investors are not looking for much of a bargain/down rounds just yet. Since there is still a lot of money in the market the down rounds are not the norm just yet but they are coming. Flat rounds are happening more frequently over down rounds. You have to remember though flat rounds are still a reasonably good valuation since the rounds raised even a year ago were already very frothy.

While many funds are trying to invest in the AI space, there are a few interesting things to note. 

1) Many of the same funds are going into almost all of the same companies with overlapping investments. 

2) Many of the companies are also getting marked up by their own investors or the same pool of investors. 

3) Many companies do not have significant revenue

4) Many companies do not have any differentiation

5) Lastly, a growing trend is open source projects gaining fast traction and raising venture capital dollars.

What I am telling our portfolio companies? 

1) AI First: As I mentioned above, I am working with companies on aligning them with the new AI trends and taking advantage of it. Some founders are making serious efforts to integrate AI in their narrative and differentiate.

2) Solve for a real painpoint: Align their product as must have vs nice to have for customers to really want to buy their products. Cutting spend is real across the board and growing pain from adoption of microservices over the last few years is becoming visible. Customers are showing signs of bundling and buying vertically integrated products. 

3) Cash Management: It would be ideal if that happened from growth and customer adoption of the startups which our startups are certainly pushing for but I am also helping them think through burn and cash planning with our companies to give them over 12 months and ideally 24 months of runway. Some of our companies are achieving good revenue milestones as well so that's been positive as well. 

Please let me know if you found this update helpful. You can also find some tweets and LinkedIn posts from me to see some real-time updates if you like on these topics.