Like many investors, I have been trying to develop a thesis around what is investable at the intersection of gaming and AI.
One of the main challenges is the pace of innovation, as well as the sheer amount of noise - most pitches these days contain at least some reference to generative AI in particular. I don’t blame founders for this - they’re responding to VC fervor - but it’s exhausting.
I don’t think it’s especially helpful to think about AI as an investable category. It is a set of technologies, each of which has a potential role in creating competitive advantages for specific sorts of companies. Many of the pitches I’ve seen lately do not appear to be tremendously focused on where their durable competitive advantage will come from, and I find this worrying. There are a couple of areas where I am especially cautious.
First, I am not enthusiastic about investing in broad horizontal solutions. There are many companies in market that, as far as I can tell, are mostly tweaking open source models to create modest differentiation along some axis (e.g. speed) but will struggle against well-funded, R&D heavy incumbents who can innovate at the core.
I am also quite skeptical of tools that use generative AI to create 2D or 3D assets for game development. There is intense competition here - the enemy of outsized returns - and it’s not clear to me who the winners will be. To be clear, some of these tools are great. Many of them are useful and very cool, and this excitement is being reflected in a torrent of signups.
However, creating tools and middleware for game developers has produced few venture scale outcomes, and it is currently hard to identify the levers these startups can pull to generate Helmer-like Power and justify their often nosebleed-inducing valuations.
Generative AI seems more likely to create value as a sustaining innovation for tools that are already part of developer workflows. We will see many more examples of things like Adobe’s Generative Fill - AI-powered features that make the products that thousands of developers already use better.
Enough negativity. Next time, I’ll discuss a few areas I think are promising.
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