Is There an AI Bubble? Two Top VCs on Valuations and ARR Inflation | StrictlyVC LA 2026

Introduction of Key Players and Fundamentals of AI Investing

• Chong, a partner at Basis Set Ventures, introduces himself as an early-stage fund focused on investing in AI, with nearly $1 billion in assets under management (AUM) and a tendency to lead seed rounds, having invested in the first generation of AI, including natural language processing, computer vision, and robotics 10s.
• Carter, the founder of M13, introduces himself, mentioning that his company has around $2.5 billion in AUM, has been the seed or series A investor in 17 unicorns, and operates out of a $400 million early-stage fund, with a focus on thinking about the right value layer and the implications of technology 1m42s.

Assessing the AI Infrastructure Bubble and Market Dynamics

• The question of whether there is an AI infrastructure bubble is raised, with Chong responding that there is both a bubble and not a bubble, citing unprecedented growth curves, such as Anthropic's growth from $1 to $40 billion in 6 months, and the changing bar for what is considered good growth 4m6s.
• Carter agrees with Chong, noting that this is not the first time venture capital has seen such rapid growth, citing examples such as the cloud, the invention of the iPhone, and the introduction of the car in the 1920s, and emphasizing the importance of understanding the implications of the technology and where the value layer lies 6m6s.
• Carter also notes that this cycle is different from past ones, as innovators are now competing not only with each other, but also with the largest and most well-funded companies in the world, which have the advantage of technology, capital, data, and talent, and suggests that companies may rise and fall quickly in this environment 8m6s.

Challenges and Opportunities for Venture Capitalists in the AI Era

• Investing in the current market can be challenging, but getting it right can make one look like a genius, despite the likelihood of having many swings and misses, and this is particularly relevant for venture capitalists (VCs) who have to navigate a large number of funding opportunities, many of which involve AI components 10s.
• The current cycle is unique in that many startups are generating revenues quickly, which can make it difficult for VCs to determine how to price deals, and this has led to a situation where VCs are seeing a high volume of pitches, with some firms boasting about the large number of deals they are considering 2m6s.
• To navigate this environment, VCs need to be thoughtful and nuanced in their approach, using tools such as "cocktail napkin math" to evaluate the potential of different businesses, and considering factors such as the size of the market and the willingness of customers to pay for particular products or services 4m30s.
• Some VCs, such as those at M13, are using technology, including generative AI, to help them sift through the large number of opportunities and identify the most promising deals, with the goal of being able to say that they only looked at a small number of deals and were able to identify the winners 6m40s.

The Role of Technology in Enhancing VC Decision-Making

• The use of AI and other technologies is changing the way that VCs operate, allowing them to process large amounts of data quickly and make faster decisions, which is particularly important in a market where there are many opportunities and limited time to evaluate them 8m50s.
• Despite the challenges and changes in the market, some VCs believe that the fundamental principles of venture capital remain the same, and that the key to success is still to be able to identify good ideas and invest in them, even if they may seem bad at first, as evidenced by the example of Airbnb, which was initially seen as a crazy idea but ultimately became a huge success 11m20s.

Evolution of the Investment Landscape in the AI Space

• The investment landscape has changed significantly over the past 4 or 5 years, with creative AI space and generative AI leading to successful companies selling generative images, videos, and world models, which has resulted in a much larger market size than initially estimated 10s.
• Examples of successful investments include companies like Cursor, which had a $60 exit, and researchers who are now in high demand and earning significant amounts of money, with some even becoming influential on Twitter 1m5s.
• The value of companies is often accrued to the largest tech companies, which will likely continue to be acquisitive, with examples including OpenAI buying other companies and taking advantage of their low cost of capital to integrate valuable data and technology into their platforms 4m20s.

Strategies for Building Defensible AI Companies

• To invest in companies that will not be negatively impacted by large tech companies like OpenAI and Anthropic, it is essential to focus on defensible technical differentiation and stay close to the latest technological advancements, investing in areas below and above AI, such as infrastructure and new technologies that support agents and automation 8m30s.
• There will be many winners in the space below AI, including companies that are rethinking infrastructure like databases and GitHub, as agents and automation require new and different solutions, and new companies are emerging to address these needs 11m40s.

Market Differentiation and Regulatory Considerations in AI

• The proliferation of AI has led to a crowded market, where investors focus on what is defensible and has long-term differentiation, with some areas being more attractive due to regulation, such as 911 call centers, which had a nearly billion-dollar exit with AI and technology disruption 10s.
• Investors consider where AI companies will go first and last, with obvious places like marketing being targeted first, while heavily regulated industries like healthcare will be targeted later, and areas with high friction, such as regulated industries, being more attractive 42s.

Founder Adaptability and Strategic Vision in a Changing Market

• Founders need to be adaptable and have a microscope to focus on day-to-day execution and a telescope to look at the bigger picture, as the market is constantly changing, and being a fast mover is not enough without a defensible advantage 2m6s.
• Some investors are interested in hardware-related bets, such as robotics, with investments in companies like Ring, Neural, and Dexterous Robotics, as well as alternative manufacturing methods, like using transgenic chickens to produce complex proteins 4m6s.

Building a Defensible Moat in Robotics and Hard Tech

• The concept of building a moat around technology and regulatory advantages is key, and investors look for companies that can create a defensible position, even in areas like robotics, where creating a moat can be challenging 5m30s.
• Investors have made various bets in areas that are considered hard, such as autonomous welding robots, autonomous trucking, and alternative manufacturing methods, with companies like Past Robotics, Ike, and Nuro being examples of investments in these areas 6m40s.
• The concept of a moat in robotics is questioned, as it is believed that unless a company has significant technical differentiation, others can easily replicate their work, and having $5 million to build something is not enough to guarantee success, especially if a larger company like Google decides to enter the market 10s.

Market Frameworks and the Nature of Innovation Cycles

• A framework is used to think about markets, where some are quickly commoditizing and require execution and speed, while others are about depth and involve hard things that are still difficult to do today, such as certain aspects of robotics or protein production 2m6s.
• The idea of white space is discussed, and it is wondered if there are still novel ideas being developed, or if they are just new versions of old companies, with the example of Airbnb and Uber being given as companies that were previously unimaginable but became huge 4m42s.
• It is believed that we are seeing a lot of new ideas, but we are still in the early stages of the technological cycle, and the first wave of any cycle is usually relatively obvious, with more competition, and it is the second or third ripple that will bring the most exciting and innovative companies 6m15s.
• The example of Anthropic and OpenAI is given, and how they were mind-blowing at first, but then became commoditized, and now there is a wait for the next ripple of innovation, which will bring new business models and companies that cannot be imagined today 8m30s.

Exploring White Space and the Future of AI Innovation

• There are both consensus categories, such as applying agents to finance or healthcare, where strong founders are going after them, and less obvious ideas, such as OpenArt, which started as an experiment and became a successful business, showing that there is still depth in the market that cannot be predicted 11m20s.

The Timing and Impact of Startup Launches

• The timing of a startup's launch can significantly impact its success, as being early to market can provide a competitive advantage, such as winning SEO and establishing a leading position as an acquisition channel, which has really helped some companies, but starting later would have missed that window when the opportunity became more obvious 10s.

Trends in Founder Age and Venture Capital Preferences

• There is a trend in Silicon Valley of chasing exceedingly young founders, with some venture capitalists preferring founders who come at a problem with a completely blank slate, and this approach may be changing over time, with some VCs gravitating towards repeat unicorn founders who have the ability to inspire 2m6s.
• Repeat unicorn founders have an advantage in the current startup environment, as they can inspire people to give them capital, write about them, and attract employees, but there is still a chance for 22-year-old founders to build great companies, and the key is to find outlier people who have a shot to build outlier companies 4m42s.
• The average age of founders in programs like Y Combinator appears to be getting younger, with more students being accepted at a younger age, which may be related to the changing value of education and the increasing agency of young people to teach themselves and build companies 6m15s.
• The trend of younger founders is also reflected in the practical challenges of hosting events for them, such as not being able to have an open bar due to age restrictions, and this has created new opportunities for businesses that cater to this demographic 8m10s.

The Role and Misuse of ARR in Startup Valuation

• The use of Annual Recurring Revenue (ARR) as a metric has become a point of discussion, with some founders being loose with their numbers and using it as leverage, and venture capitalists may be complicit in this trend, which is a product of the arms race in the startup world 10m30s.
• There is a company in the portfolio that will achieve $1.4 billion in trailing revenue and $150 billion in EBITDA this year, having only raised a Series A, which puts things into perspective when evaluating other companies' growth, such as one that is doing $6 million of ARR and has a year-over-year growth of 4x 10s.
• The focus on ARR can be misleading, as it is just one signal, and it is essential to consider other factors, such as the company's actual revenue and growth, to get a more accurate picture of its performance 42s.
• Building a successful company does not necessarily equate to a successful exit, and founders should focus on creating a business that has value to somebody, rather than just getting excited about the next funding round and their ARR 2m6s.
• VCs are complicit in the ARR and annualized math fudge, which can create noise in the early stages of a company's growth, making it challenging to determine its true value 4m10s.

The Economic and Cultural Impact of High-Valuation Tech in LA

• The impact of events like SpaceX's valuation on the LA area will be significant, with potential effects including escalating real estate prices, and the influx of money from successful investments will likely lead to the creation of new business models and opportunities 6m40s.
• Despite being considered "sleepy" or on a "siesta," LA has the potential to be a hub for the next wave of innovation, particularly in areas like brand, content, and influence, and the city should not be written off as a potential center for technological and creative growth 8m20s.

The Future of Innovation and the Next Wave of Creative and Technological Growth

• The current situation is likened to a financial ride that individuals can take advantage of, similar to selling a house, boat, or plane, and it is expected to have a very positive impact due to the large amount of money involved, particularly when companies like Anthropic and OpenAI go public, which will result in a significant distribution of funds among various investors 10s.
• The talent pool in San Francisco is notable for its technical expertise, but it is also an area where models are particularly effective at automation and acceleration, and the next frontier is expected to be in the realm of creativity, taste, and emotional resonance, such as making films, videos, and other unique content that resonates with culture 42s.
• The city of Los Angeles is mentioned as a hub for creativity, with an abundance of talent in areas like film and video production, and it is suggested that LA has a greater concentration of creative talent compared to San Francisco, with the latter's strengths lying more in technical fields 2m6s.