20VC: Why To Win in AI, Investors Need to Change Their Approach | Why VC is Run by Principals and Associates and is a Broken System | The Bull Case for Anthropic & Whether Deepseek Changes Their Strategy with Nabeel Hyatt @ Spark Capital
Apr 4, 2025
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Nabeel Hyatt, a General Partner at Spark Capital and savvy investor in AI startups, shares his insights on the evolving venture landscape. He critiques traditional VC strategies and emphasizes the need for a shift in mindset to succeed in AI investing. Nabeel discusses the flawed structure of the VC industry, stressing why many firms may be out of touch with current realities. He categorizes AI startups into adaptation, evolution, and revolution, showcasing how genuine founder relationships and a long-term vision are essential for navigating the complexities of this fast-paced market.
Investors in AI must shift their mindset from traditional metrics to a more fluid approach that embraces uncertainty and creativity.
The venture capital landscape is hindered by conservative structures that prioritize stability over necessary innovation and risk-taking.
Successful investment strategies should focus on product quality and founder creativity rather than conventional market size metrics or operational checklists.
Deep dives
The Industrialization of Startups
The current startup landscape is characterized by an industrialized approach, where professionals seek quick arbitrage opportunities to progress within their organizations. Many individuals in these roles prioritize personal promotions over waiting for substantial exits, indicating a shift in focus from long-term growth to immediate career advancement. This mindset parallels a broader trend within venture capital, where teams are increasingly reliant on repetitive, structured metrics often associated with B2B SaaS models. The emphasis on rapid metrics may undermine the creative and innovative aspects fundamental to successful entrepreneurship.
Shifting Investment Mindsets in AI
Investing in AI requires a fundamental shift in the investing mindset, moving from traditional B2B SaaS frameworks toward understanding a landscape filled with uncertainties, or 'mysteries'. Unlike defined 'puzzles', the world of AI often features unpredictable outcomes, making it essential for investors to adapt to new models of thinking. Acknowledging the unique landscape of AI necessitates an investment perspective that embraces fluidity, creativity, and subjective judgment rather than a rigid adherence to traditional metrics. This evolution in thought is essential to avoid becoming obsolete in a rapidly changing tech environment.
Challenges for Venture Capital Firms
Venture capital firms face significant challenges in adapting to a rapidly changing market, particularly due to the conservative nature of limited partners (LPs) who favor stability over innovation. The pressure to maintain consistency can stifle the necessary agility in decision-making, making it difficult for firms to reshape themselves in line with evolving trends. Moreover, this slow evolutionary cycle can hinder firms from taking necessary risks that could lead to high-value opportunities. As firms struggle with inherent structural constraints, they risk missing out on the dynamic innovations essential for future growth.
The Importance of Founder Support
Investors must recognize the value in providing focused support to founders, rather than adhering strictly to operational checklists and traditional metrics. Founders often require genuine engagement and tailored advice that addresses their unique challenges in an ever-evolving market. A strategic partnership should foster a relationship where investors act as collaborators in addressing complexities, rather than transactional contributors. By establishing meaningful connections with founders, investors can help cultivate successful ventures through the provision of valuable insights and resources.
Navigating the New World of AI
In the evolving AI landscape, companies can be categorized into three distinct groups: adaptation, evolution, and revolution. Adaptation involves existing companies merely incorporating AI into their business models, while evolution reflects a shift in user behavior and workflows, resulting in genuinely innovative applications. Revolution denotes entirely new market opportunities that are possible only through advancements in AI technology. For the future, investment focus should be tilted towards revolutionary projects that demonstrate creative problem-solving capabilities rather than merely improving upon existing solutions.
The Role of Market and Product in Investment
When evaluating potential investment opportunities, an effective approach prioritizes product quality over conventional market size metrics. Investing should focus on founders who show innovative thinking and drive, rather than sticking to outdated templates that may yield short-lived returns. A successful venture requires a deep understanding of how products resonate with users and the potential for transformative changes in the market. By concentrating on creating compelling product experiences, investors can unearth potential transformative companies that present long-term growth opportunities.
Nabeel Hyatt is a General Partner @ Spark Capital, one of the leading firms of the last decade with portfolio companies including Twitter, Anthropic, Coinbase, Affirm, Discord, Deel and more.
In Todays Show with Nabeel Hyatt We Discuss:
1. The Rules of Investing:
What have been Nabeel’s biggest lessons on price sensitivity? When did he not pay up and with the benefit of hindsight, wish he had of paid up?
How important is ownership to Nabeel and Spark? How does Nabeel think about reserve investing and doubling down?
Why does Nabeel not engage in secondary markets? How does Nabeel think about when is the right time to sell?
Why does Nabeel think the majority of market sizing is total BS?
2. The Venture Landscape: Run by Principles and Broken:
Why does Nabeel believe this generation of AI investing will require a different mindset to the one that made VCs successful over the last decade?
Why does Nabeel believe that venture is currently run by principals and associates? Why is that such a problem?
Why does Nabeel believe that the majority of venture firms today are dead but do not know it yet?
What does Nabeel believe happens to the mega multi-stage firms who have raised billions and billions?
3. How to Win the VC Game in a World of AI:
Infrastructure, models, apps: where does Nabeel believe the most value will accrue in the next decade of AI investing?
What does Nabeel mean when he says there are three categories of AI apps today? Where does Nabeel believe the most valuable will be built?
Does Nabeel believe Deepseek hurt or helped the future for Anthropic? How could Anthropic be a $100BN company from this point?
What does no one see about the next 10 years of AI that everyone should see?
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