Allied Venture Partners

Hello Partners,

As a current or prospective partner, this newsletter provides exclusive insights into our investment strategy, portfolio companies, and industry trends.

Thank you again for your continued trust and support,

Matt Wilson, MBA

Founder & Managing Director | Allied Venture Partners

Team Updates

• Our core team, including Steve, Melinda, Brendan, and Colton, is finalized.

• The Scout and Advisory programs continue to expand with several new members each week, providing quality diversified deal flow from across Canada and the United States.

New Deals

• We currently have two investment opportunities available and three more launching in the coming weeks. These include two new portfolio companies and three pro-rata follow-ons.

• Please log in to your investor dashboard to access the respective deal pages.

Portfolio News

• Rook had an exceptional Q1’24, signing six new enterprise clients and growing revenue by 68% QoQ. The team has honed their ICP and appears to have reached a critical inflection point.

• Trace received excellent coverage in TechCrunch after announcing their recent $2M oversubscribed Seed round. We are excited to have participated alongside several notable investors, including scout funds from Sequoia, a16z, and Index Ventures.

• GroWrk continues to be one of our top-performing companies. Carlos and the team consistently grow revenue double-digits QoQ and now support enterprise customers in over 150 countries.

• I’ve been invited to speak at Inventures 2024 later this month––Western Canada’s largest technology and investing conference. If you’re in attendance, please stop by my panel discussion on Wednesday, May 29, at 3:45 p.m.

Industry Insights

As we navigate the rapidly evolving landscape of Artificial Intelligence, it's critical to acknowledge that we are undoubtedly in a bubble. I am a strong proponent of learning from history and others' mistakes, so the influx of capital into AI is highly reminiscent of tech cycles we’ve seen before (e.g., internet, mobile, cloud, and crypto)––albeit at a much faster pace.

I believe 90% of the dollars currently flooding into the AI application layer will likely go to zero. Since this infrastructure layer is still evolving, it’s too soon (and challenging) to make accurate predictions on AI applications.

Markets are cyclical, and in every cycle, there are unique money-making zones, with each zone categorized as Generation 1, Generation 2, Generation 3, etc. Regarding the AI market, I believe we are currently in the bubble between 1st Gen and 2nd Gen money-making zones (see chart above).

For instance, the first money-making zone included the 1st Generation AI infrastructure layer, where investors needed to deploy capital to support foundational model development throughout the 2010s.

The current bubble pertains to 1st Generation AI application layer companies, where the initial infrastructure is established yet remains highly volatile and evolving.

The second money-making zone is where 2nd Generation infrastructure and applications will be built.

Just as we saw in previous paradigm-shifting market cycles (e.g., internet, dotcom, cloud, crypto), to make money, investors must be super early (i.e., in Zone 1) or wait for Zone 2. Otherwise, the interim bubble is full of hype, euphoria, and an eventual mass consolidation.

For example, we saw this exact scenario among first-generation internet companies that went bust during the dotcom bubble (e.g., Pets.com, Webvan, eToys, GeoCities, etc.). We saw it again among first-generation mobile apps, such as $0.99 flashlight and calculator apps that went bust as iPhone and Android continued evolving their platforms throughout the early 2000s.

In both instances, the first-generation applications were disrupted as we determined how the market would develop. Only after we gained more clarity on infrastructure did more durable, second-generation companies emerge (e.g., Facebook, eBay, Amazon, Uber, etc.).

Therefore, in today’s market, I believe established platforms like OpenAI, Google, and Meta will continue to dominate horizontally (albeit to the point of total commoditization). In the meantime, I believe vertical specialization and proprietary data moats are critical for any startup aspiring to build durability into their business model.

From an investment perspective, I am comfortable waiting 1-2 years for the second generation of AI application-layer companies as I believe they will likely yield far better returns. As highlighted above, we've seen this pattern before, where the best companies often emerged several years after the initial paradigm shift: Google (internet), Uber (mobile), AWS (cloud), and Coinbase (crypto). Even Sam Altman, CEO of OpenAI, recently stated in an interview that ChatGPT 5 will disrupt 90% of startups.

Based on the dozens of investment opportunities I see each week, the most attractive are among existing startups that have proven their value by solving real problems for paying customers. These startups are now incorporating AI to deliver exceptional customer experiences and improved unit economics.

Ultimately, volatility creates opportunity. In my 10+ years in the industry, this is the most exciting time (and vintage) to be an early-stage venture investor, and I remain highly optimistic.

As always, thank you for your continued trust and partnership.

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