In the sun-drenched innovation corridors of El Segundo, California, the latest installment of TechCrunch’s StrictlyVC event served as a high-level briefing for the future of artificial intelligence investment. The event featured a candid, high-stakes dialogue between two of the industry’s most prominent voices: Carter Reum, co-founder of M13, and Chang Xu, a partner at Basis Set Ventures.
With M13 managing $2.5 billion in assets and boasting a pedigree of 17 unicorns, and Basis Set Ventures operating as a specialized AI-first fund with nearly $1 billion in assets, the pair offered a masterclass on how to survive—and thrive—in a market that is moving with unprecedented velocity.
The State of the AI Bubble: A Paradoxical Reality
One of the most pressing questions facing modern investors is whether the current explosion in AI funding represents a sustainable growth trajectory or a speculative bubble.
Chang Xu argued that the market defies traditional labels. "There’s both a bubble and not a bubble," she explained. "We’ve never seen this type of growth curve before. When you see a company like ChatGPT go from zero to $40 billion in valuation in just six months, you are looking at unprecedented growth."
Xu pointed to the success of portfolio company OpenArt, which scaled from $1 million to $10 million in Annual Recurring Revenue (ARR) in its first year, and then to $70 million in its second, all while maintaining cash-flow positivity with a lean team of 20. For Xu, the traditional metrics for "good growth" have been entirely rewritten. If investors can price in that compounding, accelerant growth into a company’s terminal value, current valuations start to appear grounded. However, she cautioned that applying this aggressive math to every deal is a recipe for portfolio disaster.
Carter Reum provided a more historical lens, drawing parallels to the rise of the cloud, the iPhone, and the automotive industry in the 1920s. While he admitted that the current AI cycle is "steeper and faster," he noted that the dynamic of disruptive innovation remains constant. The critical difference today, according to Reum, is the presence of incumbent "hyperscalers."
"In past cycles, innovators competed with other innovators," Reum noted. "Today, startups are competing with the largest, most well-funded companies in human history. For the first time, the incumbents—Google, Microsoft, Meta—have the advantage of data, talent, and capital. It makes investing significantly harder, but when you identify the right winner, the upside is transformative."
Strategic Frameworks: Investing Above and Below the AI
With startups generating revenue at blistering speeds, discerning sustainable businesses from flash-in-the-pan wrappers has become an existential challenge for venture capitalists.
The "Microscope and Telescope" Approach
Reum emphasized the need for a bifurcated vision. "I tell every founder: you need a microscope in one eye and a telescope in the other," he said. The microscope is necessary for the daily execution of business, while the telescope is essential for navigating a market that shifts on a weekly basis. Reum’s team at M13 utilizes "cocktail napkin math" to sanity-check potential investments, asking whether a business model is truly scalable or merely a product of the current hype cycle.
Investing Below the AI
Xu’s strategy at Basis Set Ventures involves a clear architectural split: investing "below" and "above" the AI. "Below the AI," the focus is on re-engineering the infrastructure—databases, version control, and deployment tools—that were originally built for human developers. With AI agents now performing the work, these tools require a fundamental rethink. "Last year, I would never have thought you’d need a new GitHub," Xu remarked. "This year, I can count on two hands how many strong teams are going after being the ‘GitHub for agents.’"
The Moat of Friction
For startups concerned about being steamrolled by OpenAI or Anthropic, Reum advocates for a "friction as a moat" thesis. By targeting highly regulated industries—such as 911 call center technology or complex healthcare systems—startups can carve out a defensible niche. These markets are often too cumbersome for hyperscalers to prioritize, offering smaller but highly sustainable multi-billion-dollar outcomes.
Defensibility in a World of Fast Followers
A core theme of the discussion was the concept of "depth" versus "velocity" markets.
- Velocity Markets: These are defined by speed. In these sectors, the ability to iterate and execute is the primary differentiator. Fast followers are often just as effective as the pioneers, making the market highly competitive.
- Depth Markets: These are areas where "hard things remain hard." Xu cited an unconventional example: a portfolio company using transgenic chickens to manufacture complex proteins. While the application of AI is present, the physical reality of the supply chain—the time it takes for a chicken to hatch—cannot be accelerated by software. These depth markets offer long-term, defensible differentiation.
Evolution of the Ecosystem: The "Second and Third Ripples"
Reum and Xu agree that we are still in the "first innings" of the AI revolution. The current wave is dominated by obvious, high-competition categories. However, the most significant investment opportunities lie in the second and third ripples—the business models that are currently unimaginable to the general public.
Reum utilized the metaphor of skipping a rock: "The heavier the rock and the faster you throw it, the longer the ripples." He anticipates that in two to four years, the most valuable companies will be those that have moved past the initial excitement and settled into genuine utility, often at more reasonable valuations.
Implications: The L.A. Advantage and the SpaceX Effect
A significant portion of the conversation turned to the regional implications for Los Angeles. With the looming SpaceX IPO, the L.A. tech ecosystem is bracing for a massive infusion of capital and talent.
Reum believes this liquidity event will be transformative, far exceeding the impact of previous cycles like the rise of Tinder or Snap. "Every major liquidity event generates a second wave," he said. He dismissed the notion that San Francisco or other hubs have a monopoly on success, noting that while the current wave is purely technical, the next wave will be defined by "taste, culture, and creative thinking."
Xu echoed this sentiment, arguing that the next frontier of AI is not more compute, but more emotional resonance. "L.A. has taste in spades," she noted. "As models get better at automating the technical aspects of software and content creation, the winners will be those who can connect with specific cultures and human emotions—a domain where L.A. has a distinct competitive advantage."
Conclusion: A Shift in the Venture Landscape
The takeaway from the StrictlyVC gathering is clear: the era of "easy" AI investment is drawing to a close. As the market matures, the successful venture capitalists will be those who can look past the superficial metrics of rapid growth to identify structural, defensible, and culturally relevant businesses.
For founders, the mandate is to remain agile—balancing the relentless, daily grind of execution with the foresight required to pivot in a shifting landscape. As Reum and Xu suggest, the most rewarding bets are not the ones currently dominating the headlines, but the ones waiting to be discovered in the second and third ripples of the AI revolution. The intersection of technical progress and creative taste is moving to Los Angeles, and the next few years will likely prove to be the most defining period in the history of the region’s venture ecosystem.
