TechCrunch’s StrictlyVC evening in Los Angeles late last week brought together two of the more straight-talking investors working in AI right now. Carter Reum is co-founder of M13, an early-stage firm with $2.5 billion in assets under management that has been a seed or Series A investor in 17 unicorns, he says. Chang Xu is a partner at Basis Set Ventures, which launched in 2017 as one of the first early-stage funds focused exclusively on AI and is now investing out of its fourth fund, with nearly $1 billion in assets under management.
On stage, in a sun-filled room in El Segundo, the two were as entertaining as they were illuminating, covering how to price deals in a market that has never moved this fast, how to find companies that won’t get steamrolled by the hyperscalers, and what the SpaceX IPO is about to do to L.A. The conversation has been condensed and edited for clarity.
Is there an AI infrastructure bubble?
Chang Xu: There’s both a bubble and not a bubble. It’s not a bubble because we’ve never seen this type of growth curve before. ChatGPT goes from one to $40 billion in six months in terms of revenue — that’s just unprecedented growth at that scale. We have a portfolio company, Open Art, that went from $1 million to $10 million ARR in year one, and $10 million to $70 million in year two, [and it was] cash-flow positive most of that time with just 20 people. The bar for what is good growth has totally changed. When you have this possibility of compounding accelerant growth, the valuations don’t seem so crazy because you price that into the terminal value. On the other hand, if you price every single deal to that math, there’s no way that will work out well for a portfolio. So it is a paradoxical time.
Carter Reum: I always laugh because we pretend like this is the first time in venture capital land, but we’ve seen this before — with cloud, w …