You Ask, I Answer: Is the Generative AI Space Ripe for Consolidation?

In today’s episode, Justin asks if I think mergers and acquisitions are on the rise in AI. I explain why many vendors built on third-party models are vulnerable, with rapid innovation quickly making them obsolete. However, even as some consolidate, many new opportunities exist around open source models and demand for AI solutions. Tune in to hear more predictions about the fluid, fast-changing AI business landscape.

You Ask, I Answer: Is the Generative AI Space Ripe for Consolidation?

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In today’s episode, Justin asks, Do you think the AI space is ripe for M&A mergers and acquisitions? Oh, yeah, the space is ripe for mergers and acquisitions, or just companies flat out going out of business.

And here’s why.

There are a lot of vendors in the AI space whose value proposition is essentially a wrapper or user interface or something on someone else’s model.

So there’s a gazillion different little companies that all have built their company around, for example, open AI is GPT, for model, that model is very capable, it’s very powerful.

And these and folks have built a company that puts an interface on top of it that is purpose built towards one specific set of tasks.

And maybe there’s some additional value add like document storage.

But fundamentally, the underlying baseline model is someone else’s model.

And so as those models change, if the Auditory Management System changes, then the company that is built around the OpenAI space or the other companies that company has not done a good job of planning for the future, that company gets really far behind really fast.

So maybe you buy some software, blog writing software, as really just a skin on top of GPT, four or Claude 2.1, or whoever.

If that company did not think through, how do we how do we make our our software abstracted away from the base? Chris Bounds: model, then they have to stay locked into that base model.

And when it becomes old, they can’t easily adapt to whatever the new thing is.

And so they go from being best in class to being last year’s news very, very quickly.

The AI space is doubling in terms of capacity models are doubling capacity roughly every six months, six to nine months.

So if you were if you built this bespoke product around GPT three, for example, that was three years old, you are five or six generations behind.

And when it comes to compute power and results delivered, that’s a big difference.

Your company’s essentially as a non starter compared to what you can do with the foundation models themselves.

So a lot of companies have created a lot of value, but in terms of what they can get people to pay for, but that may be very transient.

Because every release of model these days, brings new capabilities, and makes it easier to replicate things that you might create software around.

For example, suppose you are a company that makes blog writing software.

And your big value proposition is is document storage that you can easily use your company’s documents within this thing.

Well, that was fine until October, November of 2023, when when OpenAI released custom GPT is and now anyone can take the documents and stuff them in a model and have that information be available.

And have it be useful and things like that.

So I remember, I was watching on threads, when the Dev Day talk was going on, people commenting, wow, they are just putting companies out of business left and right with every single announcement, because every new announcement was building capabilities into the foundation models and the foundation ecosystem that other people built entire companies around.

So what is the value proposition of that company now that the base system software? Well, the base system software is a technology that can do that itself.

And there’s a lot more coming from the big model makers that are going to imperil a lot of these smaller businesses.

Andre Karpathy, in his recent talk was showcasing how to use language models as kind of an operating system.

Think about that an operating system for your computer that is based on plain language, even something like Mac OS or Microsoft Windows might be that.

So the AI space is definitely right for mergers and acquisitions is definitely right for consolidation.

Whether that is a company getting acquired or a company just going out of business.

The AI space is right for innovation.

For every company that’s going to go out of business or get devoured, you’re probably gonna see two or three new companies that are leveraging what is cutting edge right now.

For example, there’s an open source model called lava.

That is a combination language and vision model that is very, very good and very, very powerful and also very free.

You could get a whole generation of people building companies around that model its capabilities and because it’s open source or open weights, you don’t need to pay anyone to use that as long as you are under you know, whatever the license terms are for like the llama two derivatives, it’s if you have 700 million or fewer monthly users, you can use the model for free.

So there’s just as as much as there is a lot of consolidation do, there’s also a lot of opportunity in the space.

Right now, and there’s much more demand than there is supply.

There is demand for new solutions.

I saw another kind of snarky post on thread someone saying why do we have AI that can paint and draw which you may or may not ask for we don’t have AI to do your taxes.

Right? Language models pro and doing form processing.

That’s not a terrible stretch, right? Because it’s still uses language and uses highly templated language, which should be relatively predictable.

Now doing the math part, that’s going to require some app ecosystem around something like Lang chain or auto gen or something along those lines.

But there’s no reason why conceptually, that can exist.

If a task uses language.

It is it is right for a language model to do.

So the space is right for M&A.

The space is right for fast transitions.

The space is right for innovation.

And the key message the key takeaway is you have that opportunity right now if you got an idea about ways to use generative AI.

Yeah, probably somebody’s working on it.

But you can be too began because the space is so dynamic and so fluid.

You can have more than one company that does the same thing.

And they you know, you’ll compete for market share, but the opportunities are right now.

So get started.

Get going.

Anyway, really good question.

Thanks for asking.

We’ll talk to you soon.

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You Ask, I Answer: Is the Generative AI Space Ripe for Consolidation?

Machine-Generated Transcript

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