5 Brutal Truths — Why AI Investors Tolerate Bad Economics Longer Than They Admit

Read time: 2.5 minutes

The Brutal Reality Behind AI Economics (Founder vs Investor)

1. “We’ll make margins work later.” vs. “Growth is covering costs.”
Increase Revenue, Reduce Margins.
Reality: Computing & infrastructure will grow much faster than you will be able to increase your prices.
Fix: Prove to us you can build early:
  •    Unit economics with a small amount of data;
  •    The predicted margin path prior to your Series B financing.

2. “Our usage is going through the roof.” vs. “None of you are paying enough to continue using our service.”
Engagement and a business are two different things.
Reality: Providing users with no cost does not mean you have developed a way to capture value.
Fix: Connect user engagement with:
  •    Price triggers;
  •    Actions that your users are willing to pay for.

3.   “It’s too early.” vs. “You haven’t found a customer.”
An undefined market is usually considered "too early".
Reality: If there is no person in charge of a budget, there is no company.
Fix: Make the following very clear:
  •    Who is going to pay?
  •    The line item of their budget where they will spend the money to pay you,
  •    The reason they will spend the money with you.

4. “Costs are going to drop over time.” vs. “Your dependency on others is always going to be a risk.”
Waiting for other companies' costs to decrease before you price your product.
Reality: Your pricing will be volatile and your margins will be extremely sensitive.
Fix: Control your own architecture:
  •    Your business strategy;
  •    Your caching and routing;
  •    Your cost-per-query discipline.

5. “The potential gains make the burn worthwhile.” vs. “Very few will earn that right.”
Power law thinking.
Reality: Most of you won't grow out of an economically inefficient environment.
Fix: Create a:
  •    Path to become cash-flow positive;
  •    Story, not a narrative.

💡Key Takeaway: 

Bad economics are not ignored by investors…  they take their time making decisions.