Generative AI: Lessons From Prior Waves

Generative artificial intelligence (AI) is transforming the landscape of nearly every profession, from law to computer programming to medicine. At Menlo Ventures, we’re not only avid observers of this remarkable technology, but are also active investors in its promising future. While navigating this exciting yet complex landscape may seem daunting for startups, lessons from past tech waves, along with a thoughtful, strategic approach, can help illuminate the path forward. Here, we take an in-depth look into the explosive rise of generative AI, its implications for startups, and how they might harness its potential while learning from the evolution of previous technological disruptions.

The Exponential Pace of Generative AI

Advances in the field of generative AI have moved at breakneck speeds—in just three years, we have seen a 15,000-fold increase in model size. This rapid expansion of the AI market has led to an impressively versatile selection of AI models to choose from that allow for more specific applications across a wide array of industries.

Generative AI has always seemed like something straight out of science fiction, but now it is becoming a part of everyday reality. It’s rivaling—and in some areas even surpassing—human capabilities in a range of tasks. Take ChatGPT, an AI chatbot developed by OpenAI, as an example. The latest version of the popular AI chatbot, ChatGPT-4, is now performing in the 90th percentile of the bar exam—truly a staggering feat.

In previous rollouts for revolutionary tech like cloud and mobile, large enterprises were famously late to the party. However, tech giants like Microsoft appear keen not to make the same mistake and have jumped in head first on the generative AI train. To compete, startups will need to leverage proprietary data, target underserved verticals, and move quickly.

A Glimpse Into the Past: Lessons From Tech Waves

The last 50 years have seen at least four major cycles of technical innovation that preceded Generative AI: computing, the internet, the cloud, and mobile.

Each of these waves has been ignited by a crucial innovation trigger, like the creation of the graphical user interface (GUI), the internet, the cloud, and the iPhone.

These innovations spurred mass-market technologies within three to six years, often generating enormous value. However, each wave had its fair share of false positives before seeing a decade or more of value creation.

Generative AI: A League of Its Own

The earth-shattering pace of growth for generative AI is fundamentally different from how previous technical innovations were adopted. For one, the market is now more accepting of both the risk and the reward that comes with new technology. Previously untested technologies were once considered more risky than they were worth; now it is more of a risk to fall behind other more daring competition. 

Remember, even the internet took six to seven years to reach 100 million users, and the iPhone took five years. ChatGPT, on the other hand, only took a mere two months to achieve that same milestone.

Another significant difference is that generative AI doesn’t require a complete platform shift. Unlike the move from on-premises software to cloud or desktop sites to mobile, generative AI can be integrated within minutes and utilized via an API. This means the adoption curve is expected to be much steeper.

Harnessing the Wave: Menlo’s Investment Strategy

Recognizing that a few disproportionately large platform companies are often formed early in the wave, we’ve been confidently betting on companies like Pinecone and Anthropic. As the wave progresses, we’ll continue to invest in the generative AI stack, with a focus on founder vision (like Typeface). We’re particularly interested in verticals like healthcare, legal, and finance, which are ripe for AI disruption.

We find ourselves inspired by groundbreaking advances in generative AI and even more excited to work with the kinds of innovative risk-takers willing to tackle it head on. This rare and massive platform shift will transform industries, displace massive incumbents, and birth new decacorns. We are confident that bold business moves on visionary founders and platform companies will pay off. Additionally, we believe that steady investment in the application layer will yield the greatest returns in this new tech wave. We are eager to partner with founders building products and services that utilize generative AI in exciting new ways.

There will certainly be hurdles to overcome when dealing with any rapidly evolving technology, but these are acceptable risks given the known payoffs. In the end, it’s not just about riding the wave. It is about shaping its course. Startups have an exciting opportunity right now to shape their own path in the generative AI landscape—which is no easy feat in this crowded market. The fast-paced nature of this technology doesn’t just mean more competition—it also means there’s more room for innovation, discovery, and value creation.

As we look toward the future, we are excited to see how generative AI will continue to redefine our world. We are eager to see how startups will navigate this nebulous landscape, and it is our responsibility at Menlo to find creative solutions to support these ventures. Just as we learned valuable lessons from past waves, we are committed to investing in the possibilities that generative AI brings and contributing to the transformative power of this unprecedented technology.