AI Investors Reveal How They Pick Winners in a Fast-Changing Market

Artificial intelligence is evolving at a pace that even seasoned venture capitalists admit is difficult to keep up with. At TechCrunch’s StrictlyVC event in Los Angeles, two experienced AI investors shared how they’re navigating a market where startups can grow at record speed, valuations are soaring, and competition from tech giants is reshaping the investment landscape.

The discussion featured Carter Reum, co-founder of early-stage investment firm M13, and Chang Xu, partner at Basis Set Ventures. Together, they explored how investors evaluate AI startups, identify businesses that can survive against major technology companies, and why Los Angeles could become one of the next major AI hubs.

AI Growth Is Unlike Anything Investors Have Seen

According to Xu, today’s AI market is difficult to define as either a bubble or a normal investment cycle.

She pointed to the explosive growth of AI companies, noting that ChatGPT generated roughly $40 billion in revenue within six months, something rarely seen at such scale. Xu also highlighted one of Basis Set Ventures’ portfolio companies, OpenArt, which expanded from $1 million in annual recurring revenue (ARR) to $10 million in its first year, before reaching $70 million ARR in its second year. Remarkably, the company remained cash-flow positive for much of that period while employing only around 20 people.

This kind of rapid expansion has changed how investors think about startup valuations. While future growth potential can justify higher prices, Xu acknowledged that applying the same assumptions to every investment would create significant portfolio risk.

Bigger Competition Than Ever Before

Reum believes today’s AI boom resembles previous technology revolutions, including the rise of cloud computing, smartphones, and even the early automobile industry.

However, he noted one major difference.

Unlike earlier cycles where startups mainly competed against other startups, AI founders now face competition from the world’s largest technology companies, many of which already possess enormous financial resources, vast datasets, cutting-edge research teams, and global customer bases.

Because of that advantage, Reum believes successful AI startups can grow rapidly—but they may also lose momentum just as quickly if larger companies enter their markets.

Valuations Still Need to Make Sense

Even in today’s fast-moving environment, M13 continues to rely on simple financial analysis before investing.

Reum explained that his team often estimates how large a market could realistically become by comparing it with previous technology cycles. When evaluating an AI software company serving brands, the firm asked whether businesses would actually spend two or three times more on software than they had in previous generations.

After reviewing those assumptions, M13 ultimately decided not to invest because the long-term financial projections didn’t justify the valuation.

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