AI investing faces a paradox as VCs weigh unprecedented growth against hyperscaler threats
Two leading investors unpacked the valuation, differentiation and regional impact of rapid AI growth at StrictlyVC in Los Angeles. M13’s Carter Reum and Basis Set Ventures’ Chang Xu warned that AI investing must balance fast revenue trajectories with defensible moats against Big Tech.
Reum and Xu Describe the “Paradox” in AI Investing
Carter Reum and Chang Xu framed the current market as both unusually fertile and unusually risky for AI investing. They argued that extraordinary early revenue gains make valuations appear justified, while the same dynamics can quickly create bubbles if every deal is priced to extreme growth.
Both speakers pointed to examples of startups scaling rapidly and to the broader shift in investor expectations. They emphasized that while rapid compounding can produce winners, treating every company as if it will achieve those outcomes is a losing strategy for diversified portfolios.
Valuation Discipline and the “Cocktail Napkin” Approach
Reum said his firm still relies on simple, conservative math to test whether a business can justify current pricing. When revenue growth appears strong but unit economics or market limits remain unclear, his team walks away rather than forcing a fit.
Xu reinforced that timeliness matters: growth that looks impressive today may not indicate durable advantage tomorrow. Investors, he said, must measure whether current metrics project into a future where a startup remains protected from commoditization.
Investing Above and Below the AI Stack
Xu described a framework that separates opportunities “below the AI” — core infrastructure reimagined for autonomous agents — from those “above the AI,” which layer applications and user experiences on top of models. He argued that the technical frontier shifts every quarter, changing what is defensible.
Below the stack, teams rebuilding databases, deployment tooling and developer workflows for agent-driven systems can capture new technical moats. Above the stack, differentiation requires long-term product advantages or deep domain understanding that models alone cannot replicate.
Targeting Friction and Regulation as Defensive Moats
Reum explained that his firm intentionally seeks businesses where regulation or operational friction slows large incumbents. He cited mission-critical public safety and healthcare-adjacent use cases as examples where hyperscalers face structural barriers to rapid takeover.
He urged founders to maintain both granular operational focus and strategic foresight. The combination of weekly execution and long-term scenario planning, he said, is essential when an incumbent’s entry can change market dynamics overnight.
Depth Markets Versus Velocity Markets
Xu introduced the distinction between depth markets, where technical difficulty and time-to-value remain high, and velocity markets, where speed of iteration rewards fast followers. Investment strategy varies depending on which market a startup targets.
He offered unconventional examples to illustrate depth markets’ persistence, while pointing to creative AI and generative content as areas where unexpected business models have rapidly emerged. In velocity markets, execution cadence and product-market fit trump early technical novelty.
Los Angeles, Liquidity and the Next Wave of Startups
Both investors predicted that a major liquidity event tied to aerospace or AI companies could seed a fresh wave of entrepreneurship in Los Angeles. Reum noted that widely distributed employee gains from a large IPO would likely fuel local buying power and second-wave startups.
Xu added that L.A.’s cultural assets — expertise in storytelling, content and taste — complement technical innovation concentrated elsewhere. He suggested the next frontier of AI will prize emotional resonance and cultural specificity, strengths that favor the region’s creative ecosystem.
The conversation in El Segundo underscored a simple truth for anyone allocating capital to AI: rapid revenue and technical progress create opportunities that must be matched by disciplined valuation, clear defensibility and an eye toward the shifting competitive landscape.
