Sequoia anticipates greater profits in AI-linked software than in AI models

Venture capital giant Sequoia Capital believes that the majority of billion-dollar companies created in artificial intelligence will come from creating applications rather than making models, although it is investing in both, partner Pat Grady told a conference Wednesday, according to a report by Bloomberg.

Speaking at an event hosted by Goldman Sachs Group Inc. in San Francisco, Grady said the firm had put about $150 million into companies building foundation models, including Sam Altman's OpenAI, Ilya Sutskever's Safe Superintelligence Inc. and Elon Musk's xAI. These models form the foundational layers powering products from many of the most recent AI companies; they are extremely costly to build.

With more than $55 billion under management at Sequoia, it's spent relatively little on such endeavours, Grady acknowledged.

Add WION as a Preferred Source

“We have an order of magnitude more dollars invested at the application layer, even though the revenue being generated at the application layer is a lot less,” he said, referring to AI companies that build products that use the models in novel ways. But in AI, “it seems to us that the application layer is where the largest number of billion-dollar-plus companies is going to come.” Grady didn’t provide a dollar figure for what Sequoia had spent on other AI companies.

Good AI application startups thoughtfully design a product on top of the models, he said. Grady cited a portfolio company that has built a noble AI-based customer relationship management software, later identified by the firm as Day.ai. "There's a lot of product work required to figure out the right way to actually package this stuff," he said.

One factor driving outsized spending around AI overall, he said, is what he called the "wowed-by-science effect"-meaning that investors tell themselves a startup is sure to succeed because "this stuff is so cool. These people are so smart." Sequoia tries not to make that assumption, he said.

He also hyped the imminent release of OpenAI's Strawberry model, saying it is "pretty darn good.".

All told, Grady has invested in AI companies like Harvey, a legal service, and Notion Labs Inc., a productivity tool.