Sierra Ventures On The 5 Layers Of AI Startup Investment听

Editor鈥檚 note: This article is part of an ongoing series in which 附近上门 News interviews active investors in artificial intelligence. Read previous interviews with Felicis, Battery Ventures, Bain Capital Ventures, Menlo Ventures, Scale Venture Partners, Costanoa and Citi Ventures as well as highlights from more interviews done in 2023.

Early-stage venture investor seeks AI startups that address massive pain points, have rich datasets and provide large efficiency improvements.

We recently spoke with , a managing partner for 24 years at Sierra Ventures, about what that investment thesis looks like and its five-layer “layered cake” framework for AI investments. The San Mateo, California-based firm is investing from its $265 million 13th fund, announced in September 2023.

In the current era, AI startups that show success have founding teams with unique perspectives and demonstrate clever application of AI and efficient distribution through product-led growth or word of mouth, Guleri said.

The most obvious change from the prior investment cycle is the number of teams pursuing a particular idea, said Guleri. That means 鈥渢he premium is on the team, and the way they execute the idea, not the idea itself.鈥�

Art of the possible

Tim Guleri, managing partner, Sierra Ventures

The cloud era was primarily efficiency-driven, Guleri argues, while the AI age is about innovation.

鈥淲ith generative AI there’s been so much of a reset and re-excitement of the art of the possible,鈥� said Guleri. 鈥淚t feels like a 10x to 100x unlock.鈥�

Artificial intelligence has captured the imagination of听 the world’s 16 million to 20 million developers, and it feels like they are all working on some aspect of generative AI, said Guleri. 鈥淎 lot of these people are retooling themselves in a hurry to do something in the generative AI layered cake,鈥� he said.

Market size

Global GDP is, of which $6 trillion comes from agriculture. Guleri believes generative AI will bring massive efficiencies to the remaining $104 trillion of the world economy, which is largely services and industry.

In the infrastructure layer alone, AI is a $50 billion market, Guleri estimates. Even if it grew 25% year over year, it is still a fraction of global GDP, he said, amounting to half a trillion dollars.

鈥淚t’s the wave that’s lifting everything on top of it,鈥� he said. 鈥淭here’s going to be a tremendous amount of value creation in the coming decades.鈥�

The AI layered cake investment framework

So where to invest? Guleri describes Sierra Ventures’ approach to AI investments using a layered cake framework with five distinct layers:

Infrastructure: This layer 鈥� which Sierra Ventures is not investing in 鈥� encompasses the foundational hardware underpinning AI. That includes GPUs, AI labs, data centers requiring highly specialized skills, and massive capital investment.
Applied infrastructure: This refers to specialized AI implementations built on foundational models. Sierra invests at this layer, including in , which aims to improve e-commerce conversion rates through personalized customer search.
Horizontal applications: This layer refers to industry-agnostic AI solutions for common business functions. Sierra invests here, too, including in , which aims to reduce legal department costs in large enterprises through AI.
Vertical applications: These are industry-specific AI implementations. Sierra invested in vertical application for insurance underwriting automation.
Novel innovations: This final layer refers to entirely new applications and business models made possible by AI. Sierra sees this layer as having the most promise, although it requires the most intellectual effort.听An example of an investment is , a biomedical company building tests on donated human organs, which speeds up research and provides new data sources.

The firm is investing for where the markets will be in three to five years, Guleri said. 鈥淲e’re waiting with bated breath for the IPO market to open up,鈥� he said. 鈥淚 think liquidity will come.鈥�

For now, 鈥渨e’re patiently building.鈥�

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