How investors think about early stage AI startups

Are you building for horizontal or vertical innovation?

The framework HAS vs VAS is a simple, but effective framework. It allows investors to quickly assess the startup, think about the investment needed and determine what type of questions to ask to get a deeper understanding of the company.

VAS startups usually need to show the usual business metrics of user/customer growth and defensibility, while HAS startups generally revolve around pure technology and/or a killer team. Investors make a snap judgement based on this framework and work backwards on how they approach an investment.

In truth, HAS vs VAS is more like two axises X and Y, and a startup falls somewhere between them; but for simplicity these two conditions are discrete.

More specifically, if a startup is VAS, investors may want to wait to see user/customer growth metrics (if they are bullish) and even revenue (if they are bearish) before deciding. The only solution, at that point, for founders is to continue to drive for growth and demonstrate that they can acquire users at a cost-effective rate (if the startup is B2C) or have commitments from large enterprise clients (B2B). All these are proxies for potential revenue, if one assumes a revenue number per user/customer.

Build Something People Want

Breaking this down even further, the key to growth is to build a great product that your users love. You can use Net Promoter Score to monitor user satisfaction, survey a swath of users, or use any one of the plethora of methods on the market to find how users really think. There really is not a panacea on how to build a product users will love, but one principle is the ability to iterate quickly based on user feedback.

My favorite story is how Pinterest, initially to overcome slow growth, talked to its users face to face to figure out what to build and overcome its growth limitations. Some founders instinctively know what users will want, but for most others the disciplined approach of growth from listening to users about what they could not live without.

The three risks with VAS:

1. the business will be small and do not generate the required return for investors
2. the team does not have the required expertise to grow market share
3. there is no defensible moat.

For startups that are HAS, investors generally want to see a technical validator signal. A signal could mean a key team member, advisor, early stage investor, or potential investor that is technical enough to understand the technology and its potential. The reason for this is that most investors are not technical, and having a signal that validates the superiority of technology overcomes an investor’s cognitive bias on investing in something they do not know.

Founders should think about how to generate a technical validator signal by actively enlisting such a signal. This could mean recruiting that key team member, bringing on board a technical advisor, or making sure investors are lined up that are extremely technical and able to commit sizeable capital before returns.

There is a larger perceived risk from doing a HAS startup, since it is “all or nothing”. The things investors want to see is if whether a startup is truly innovative and/or does the technology provide a cost or use advantage that is 10x greater than the incumbent. There is increasingly a perception that only famous professors can create HAS, however.

Thank you eamonncarey , Jeffrey Paine, Kenta Adachi, Shumpei Fukui 福井 俊平 , Naoki Kamimaeda, and Alexandre Winter for feedback