How investors are pricing deals in a fast-moving AI market

During an event late last week in Los Angeles, investors discussed the challenges of pricing deals in a rapidly evolving artificial intelligence market. Carter Reum, co-founder of M13, represented the firm which manages $2.5 billion in assets and has invested in 17 unicorns—startups valued over $1 billion. Alongside him was Chang Xu, partner at Basis Set Ventures, an early-stage fund focused on AI that launched in 2017 and now manages nearly $1 billion in assets. Both investors highlighted the difficulty of evaluating startups when valuation metrics struggle to keep pace with unprecedented growth.

Addressing whether the AI sector is in a bubble, Xu noted that there is simultaneously a bubble and not a bubble. She pointed to unprecedented growth curves, such as ChatGPT growing its revenue from $1 billion to $40 billion in six months. However, Reum cautioned that this cycle differs from previous tech waves because startups are competing directly against hyperscalers—large-scale cloud computing providers—and the largest, most well-funded innovators on the planet. According to Reum, incumbents actually hold the advantage in this cycle due to their technology, capital, data, and talent. As a result, he warned that some companies may potentially fall as quickly as they rise.

To navigate this volatility, Carter Reum, co-founder of M13, advises entrepreneurs to maintain a dual perspective: “I tell every founder: you need a microscope in one eye and a telescope in the other.” This involves executing short-term tasks while constantly scanning the shifting landscape. Xu explained that Basis Set Ventures categorizes opportunities into velocity markets, where fast followers execute rapidly, and depth markets, where complex challenges remain difficult to solve. For instance, their portfolio company Open Art, which operates with 20 employees, scaled its Annual Recurring Revenue (ARR) from $1 million to $10 million in its first year, and from $10 million to $70 million in its second year. Xu also cited Cursor, which achieved a $60 billion exit despite skepticism.

The investors also discussed regional dynamics, particularly the upcoming SpaceX IPO. Reum asserted that the liquidity event is going to distribute significant capital to employees and residents in Los Angeles, potentially triggering a second wave of startup activity. While San Francisco has concentrated technical talent, Xu suggested that the next frontier of AI will rely heavily on “taste”—the ability to make things that resonate emotionally and connect with specific cultures. This shift could position Los Angeles as a hub for the next wave of AI applications.

Why it matters

Investors are shifting focus toward defensible differentiation as AI markets evolve, with the upcoming SpaceX IPO poised to reshape the Los Angeles startup ecosystem through significant capital distribution.