Venture Capital Trends in AI Investment Strategies

Investors like Sapphire Ventures focus on mid to late-stage B-to-B companies leveraging AI for strategic growth and validation.

### Investing in AI: Insights and Strategies for 2024 and Beyond
* 💼 Sapphire Ventures is focused on mid to late-stage B-to-B companies that demonstrate **product-market fit and revenue generation**, particularly in the **AI sector**.
* 🔍 In 2023, the investment landscape was characterized by **experimentation**, while 2024 is expected to **validate returns on investment**, leading to **broader enterprise adoption** in 2025.
* 📈 The firm has made several investments in 2024, although **high valuations in AI** make it a **challenging environment for investors**.
* 🤝 Sapphire looks for companies that not only have **potential for IPO** but also **strategic value for larger tech players**, indicating a keen interest in **M&A opportunities**.
* 🏭 Industries that have historically lagged in technology adoption, such as manufacturing and healthcare, are now seen as **ripe for significant technological advancements**.
* 📊 An example of successful investment includes a Series D company that enhances tenant-landlord communication, showing **measurable improvements in accuracy and customer satisfaction**.
* 🌟 The current focus on mega deals in AI may create opportunities for firms like Sapphire to invest in **promising mid to late-stage companies** that are often overlooked.
* 🚀 One notable portfolio company, Metal Bowl, utilizes generative AI to **streamline clinical trial processes**, showcasing how traditional industries can leverage modern technology for **efficiency**.

1 billion is a commitment. I guess the easiest place to start is how did that go and how did you go about deploying the capital? Yeah, absolutely. First of all, great to be here. Ed Sapphire Ventures. We're focused on investing in B-to-B companies at the mid to late stage. So we're really looking for companies with product-market fit, are generating revenue, and that are proven businesses with AI. There has been so much innovation, and there's been waves of adoption. So what we saw really was in 2023, it was a year of experimentation. This year, 2024 was a year of ROI validation and people actually starting to play with these tools and getting us out of it. And we believe that next year, 2025, will be the year of widespread enterprise adoption. Now that being said, we've been very active in 2020. Ford have made several investments already. I sense some sort of tension out there maybe between the venture capitalist and

large tech companies that are making very similar investments, or they're developing technology themselves. And one of your historic portfolio companies is MuleSoft. Bear with me. But I picked that case because ultimately Salesforce went on to acquire MuleSoft. It was an interesting exit, right? How do you find that next kind of MuleSoft-type company? But in the AI context, I think this conversation is so interesting when we're talking about Journey AI companies, right? In many ways, the incumbents, rather itself Salesforce, Microsoft, Amazon, you name it. They're all actively investing in young AI startups because they're trying to ensure that their future will have AI in it. As an investor, what we look for closely are companies stand-alone that we think are amazing businesses and can go all the way to IPO. But we also consider other exit paths, including to M&A. So we pay a lot of attention to companies that we believe hold strategic real estate for many of the large tech

players. Casey, what are the valuations like in the space that you're trying to put money to work? You say you've done a couple of deals in 2024 already. They Hi, that's a great question, Caroline. The short answer is yes. The reality is that AI is so consensus right now, which arguably means it's a really difficult time to invest because the valuations are so high. So if a perfect deal, that means a perfect valuation. I think our approach and my approach at Sapphire is you have to take a different approach to investing. And because it's still in the early stages of manifestation into different types of companies, you have to take a leap of faith on some dimension. So for me, for example, the leap of faith that I'm taking, which is based again on data and research, is that industries that have historically been technology laggards in terms of adoption are now going to adopt technology in

mass. So two examples are a lot of different verticals, right? So manufacturing, construction, health care, legal, these are companies in industries that are still operating on pen and paper and on mainframe computers. And the second one is really small businesses, the backbone of the US. Over 80% of US businesses are companies under ten people that have historically not been able to research the latest and greatest when it comes to technology. I love what you said before about the validation. We're currently at the point where you have to validate the return on investment. I don't feel like we've had that yet and I'm wondering whether you're seeing it in the startups you backed and how you're measuring it. Cathy That's that's such a on point question. Caroline I think we've already started that phase. I'll give you an example. Sapphire recently backed a lease. I mean, I was on the show a couple of

weeks ago. That was a Series D company. What Alisha does is own the entire conversation end to end between a prospective tenant or a tenant and a residential building. A lot of their customers are sophisticated residential real estate companies. They do a lot of internal benchmarking. They don't just trust a lease to show their own benchmarks. They actually do it in-house. And the data shows significant improvements in accuracy, significant improvements in actual results, including customer satisfaction. Some of the news of late has been open. Air is big primary at a very high valuation, then reports about and from it getting itself organized. And one report I spotted was that the minimum check for the open air round as an example was $250 million. What's the trickle-down effect of that for you? Can you explain that question a little? Yeah. So everyone's clamoring to get into. Very small concentration of names,

including through SPVs. Does that kind of open up the field for you to sort of have access to more startups where people aren't paying attention? Or is it just that you kind of have to say, Oh, do I need to be involved in this round even if it's a stretch for me at Grove Stage? Great question. And look, at the end of the day, as investors, it's our job to allocate capital in our fund construction, and that means thematically what we invest in. There's always going to be great deals out there, but we have to find the best use of our capital based on our strategy. So I think it's a great thing for companies like Sapphire, right? Other investors are busy chasing these mega deals in these ultra-late stage companies, or they're going super, super early hype companies that may not have a lot of revenue. That leaves more greenfield for companies like Sapphire that, again, are

focused on that mid to late-stage company proven. And by the way, it's not just I. There's plenty of amazing companies out there that aren't Gen I native companies, and more investors are looking only at A.I. I think that's great for us. Okay, name one that isn't to do with Gen Zers. I think that it's been exciting to be able to get into or at least analyze. You know, I think one interesting way to play that broader Gen AI strategy is to think about companies that are leveraging Gen AI for themselves. So I'll give you an example. Metal Bowl, which is a Sapphire Portfolio company, is a software platform that allows clinical trials to be performed in a decentralized manner. It's not a Gen II native company, but they're actually actively using Gen AI technology to vastly improve implementation time. So Butterball's working with the largest life sciences companies in the world, and implementations can take a long time.

because of the complexity. But now, converting a thousand-page trial document in a way that is automated and someone without technical expertise can set it up is a game changer.

Investing in AI Native Startups

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Investing in B-to-B Companies: A Focus on AI

Sapphire Ventures is investing $1 billion in mid to late-stage B-to-B companies with proven business models and product-market fit, particularly in the AI sector.

The firm has been active since 2020, with a focus on companies that can potentially go public or be acquired.

The current trend sees large tech companies investing in young AI startups, creating a competitive landscape for talent and innovation.

Investing in AI: Valuations and Opportunities

AI investment valuations are currently high due to consensus in the market, making it a challenging time to invest.

The approach at Sapphire involves taking a leap of faith on industries that are technology laggards, such as manufacturing, construction, healthcare, legal, and small businesses.

The need for validation of return on investment is increasing, and Sapphire has already started backing startups to measure this impact.

Alisha's Impact on Residential Real Estate

Alisha's company manages the entire tenant-building conversation, serving sophisticated residential real estate firms.

They conduct in-house benchmarking, leading to significant improvements in accuracy and customer satisfaction.

The recent high valuations of companies like OpenAI are causing a concentration of investment, potentially opening up opportunities for firms like Sapphire to focus on startups that are being overlooked.

Leveraging Gen AI in Mid to Late-Stage Companies

Investors are increasingly focusing on companies leveraging Gen AI, not just those native to Gen Z.

Metal Bowl, a Sapphire Portfolio company, is using Gen AI technology to streamline decentralized clinical trials, significantly reducing implementation time.

The company's innovative approach to automating trial document conversion is transforming the complex process, making it accessible for individuals without technical expertise.