This Week in Venture Capital and Artificial Intelligence

Every week I will share and summarize 3-5 ideas and insights with the LinkedIn community. Some of the summarizations I may have covered during the week, and other things may have just been passing thoughts.

1. HAVE CHARACTER DON’T BE A CHARACTER

There is a difference between being a character and having character. Characters are the people you see play roles in movies. Having character are the people who don’t do things for their own best interests, but rather for the greater good. This is one thing I would like to see change in the Startup and Venture Capital industries.

So I will ask you, do you want to be a character, or do you want to have character?

Remaining leadership at Character.AI now faces the task of convincing around 100 employees to stay on board with new bosses and a redefined mission, while others have already cashed out and moved on. I wouldn't stay (if you don't have loyalty to me, you're dead to me and there is no amount of money that can convince me otherwise), but I am sure they will dangle $$$$ in front of these people to bribe them; as happens so much in business. It's the ultimate "man left behind" scenario, raising questions about the true character of those who sold out early. Are these founders genuinely committed to building something meaningful with their teams, or is Silicon Valley simply becoming a breeding ground for quick exits and empty promises?

As a Venture Capitalist, character is more important to me than product. Quick exits are not. But if we are more focused on patience and making a long-term impact, we won’t just exit, we will change the world. You see, Character.AI didn’t change the world, they just made some headlines and a quick exit. Respectable, but not admirable. We will leave no man behind, we will exit together as one, not as two, three or fours, and when we do, we will change the world ...

As a venture capitalist and entrepreneur for almost a decade now, I’ve seen my fair share of characters in Silicon Valley and the world, but the latest acqui-hire frenzy takes the cake. Imagine pouring millions into a startup, hoping for a 50x return, only to end up with a modest 2.5x. Not exactly the victory we were aiming for.

And here’s the kicker: In today’s world, if you want to get hired in AI, just build a company—even if it’s not that good! Yep, that’s the secret sauce.

Character.AI —a startup that raised a cool $150 million just last year, skyrocketing its valuation to $850 million. With 3 million downloads and a top 15 spot in the App Store, it seemed like a golden child, right? But here’s the kicker: despite all the hype, their growth has been anything but stellar. Revenue? Barely a whisper. Their niche chatbot app made just $200k in July, and projected annual revenue of $17 million? Hardly self-sustaining and the company is riddled with declining traction and departing users.

Imagine buying a $100,000 luxury car on a 60-month term with no down payment, leaving you with a $1,700 monthly payment. Now, let’s say this beauty guzzles gas at 1 mile per gallon, and you drive 200 miles a week. That’s 200 gallons of gas per week, costing you $1,000 weekly at $5 per gallon, or $4,000 a month. Unfortunately, all businesses lose value over time, just like cars, we just hope it’s many years before this happens. This is why you need a solid exit strategy. So, you’re forking out $5,700 every month just to keep this thing running. Sound like a good deal? Probably not—just like investing in a flashy startup that’s burning cash faster than it’s making it. It’s a shiny asset with no real return, and you’re left wondering when to cut your losses.

Why did Google Do This? Google didn’t drop $2.5 billion on Character.AI for their groundbreaking traction (because, let’s be honest, it wasn’t). They did it to scoop up a couple of superstar founders.

Google acquired Character.AI primarily to secure the top-tier AI talent behind the company, particularly its cofounders, who are recognized as experts in the field. Rather than focusing on the company's product, which had niche appeal and limited revenue potential, Google was more interested in strengthening its AI capabilities in a highly competitive market. By acquiring Character.AI , Google could enhance its position in the AI talent wars and circumvent regulatory scrutiny that traditional acquisitions might face.

Google licensed Character.AI 's technology rather than outright acquiring the company to avoid regulatory scrutiny associated with traditional mergers and acquisitions. Licensing allowed Google to benefit from Character.AI ’s advancements without triggering the same level of antitrust concerns that come with full acquisitions, particularly under the current regulatory environment. Additionally, by licensing, Google could integrate the technology more seamlessly into its existing platforms while still securing the key talent from Character.AI to enhance its AI development capabilities. So, if you’re a brilliant mind with an itch to work at a tech giant, just slap together a startup, get some VC funding, and wait for the acqui-hire offers to roll in. The founders of Character.AI may not have originally set out with the intent to be acqui-hired by Google, but that's how the story unfolded. What started as a promising venture in AI became a prime example of Silicon Valley's latest trend: acquiring startups not for their products, but for their talent. It's a reminder that in today’s tech landscape, even if your startup isn’t a blockbuster success, it can still be your golden ticket to a lucrative position at a tech giant.

VCs, Let’s Protect Ourselves: In this bizarre new world, we VCs need to be smarter. Tighten those contract clauses to ensure we get a fair share of any acqui-hire bonanza. Focus on founders who care about building something lasting, not just a quick exit strategy. And diversify, diversify, diversify—because in a talent-driven market, spreading your bets is key.

Founders, Before You Cash Out: Founders, before you build that so-so startup just to get a cushy job at Google, consider this: Do you want to be the person who sold out and cashed in early or the one who built something meaningful? Your legacy matters, and so does the team you leave behind. And remember, burning bridges with your VCs now could mean fewer doors open for you later.

The New Reality - Building Mediocre Startups as a Career Path: In today’s Silicon Valley, the quickest way to a high-paying job at a tech giant might just be to build a company—even if it’s not that great. As VCs, we need to adapt to this reality and protect our investments. And for founders, while the allure of an acqui-hire might be strong, don’t lose sight of the bigger picture. Legacy, impact, and long-term relationships are worth more than a quick payday. So, if you’re going to build something, make sure it’s worth building—and not just a ticket to your next gig.

2. YOU CAN’T SAY CALIFORN (IA) WITHOUT THE AI: IF YOU WANT TO BE IN AI, MOVE TO CALIFORNIA

Why would you not want to move to California? Beautiful beaches, beautiful people, every sports team you can imagine, palm trees, mountains, sun, sun, sun, and almost every landscape possible. People have been leaving California to go to other places, but they’re making it just like California. LoL!! Here is a link

The large complaint is prices and traffic. I advise all entrepreneurs to build their life and adjust their life around California, don’t expect California to adjust to you, as you should with all things. In other words, get a high-paying financial strategy, incorporate a business as a pass-through in a tax-free state and pay yourself like a reasonable salary say like $100,000 annually from that. All other expenses go through the business. Next thing is, work remote. No one comes here to work in an office. Work on the beach! Still got price hesitancy? What goes up will come down. Just have patience. So I can tell you one thing, I am not going anywhere; I don’t run from situations when they don’t work for me, instead I figure out how to fit myself into a situation to my benefit. I love California and its tech scene. If you are in AI you can do very well here!...

Myself, Paul Anthony Claxton and my firm, Q1 Velocity Venture Capital , chose to base our operations in California, the undisputed leader in artificial intelligence. With over 50 percent of AI investments in the U.S. happening here, California stands out for its unmatched ecosystem that blends cutting-edge research institutions like Stanford University and University of California, Berkeley with tech giants such as Google, Meta , and NVIDIA . This unique environment houses innovation and attracts top talent from around the world, making California the epicenter of AI development.

Strategic Geographical Advantage: California is uniquely positioned as a gateway for international trade, thanks to its many major ports that border the Pacific Ocean. Its proximity to Mexico and a day’s drive to Canada further enhance its strategic importance. These factors make California an important hub for global commerce, especially for companies involved in international trade and AI-driven logistics solutions.

Research Powerhouse: California is home to world-class universities and research institutions that drive next-gen advancements in AI. Institutions like Stanford and UC Berkeley produce groundbreaking research and a steady stream of AI talent, feeding into the state’s vibrant tech ecosystem.

Tech Giants Hub: Silicon Beach in Los Angeles, and Silicon Valley in San Francisco, the brain and heart of California’s tech scene, hosts some of the most influential AI companies, including Snap Inc. (Snapchat), Tinder , Netflix and SpaceX in Los Angeles,? and Google, Meta, OpenAI , and Nvidia in San Francisco. These companies not only lead in AI development but also set global standards for innovation.

Supportive Ecosystem: The state’s expansive network of venture capital firms and incubators offers unparalleled support for AI startups. Entrepreneurs looking to build the next big thing in AI find the resources, mentorship, and funding they need to thrive in California.

Regulatory Leadership: California’s government, led by Governor Gavin Newsom, has proactively embraced AI through recent bills being legislated such as SB1047, ensuring the state remains at the forefront of the industry.

Diversity and Inclusion: California’s highly diverse population provides an ideal environment to focus on underrepresented initiatives. The state’s multicultural makeup allows for a broad spectrum of perspectives and fosters a culture of inclusion, which is essential for addressing complex societal challenges with AI.

Global Influence: As the world’s fifth-largest economy, California’s decisions have a ripple effect globally. The state’s leadership in AI not only shapes U.S. policy but also influences international AI standards and practices.

Challenges and Opportunities: While California is a beautiful place to live and work, it also faces massive challenges such as housing shortages, crime, climate issues, population growth, and job market pressures. These challenges present opportunities for AI and my firm, Q1 Velocity to develop and invest in innovative solutions that can improve the quality of life for Californians and throughout the world and set new standards for urban development and sustainability.

Why You Should Be in California for AI: If you’re looking to build a career or a startup in AI, California is the place to be. The state offers unmatched opportunities to work alongside industry pioneers, access to cutting-edge research, and the chance to be part of a dynamic ecosystem that’s driving the future of technology. With a robust job market boasting over 70,000 AI job postings and a tech culture that thrives on innovation, California is where the next generation of AI leaders will emerge.

California isn’t just leading the AI charge—it’s defining it. For those with the ambition to make their mark in AI, the Golden State is the ultimate destination. Its strategic location, diverse population, and unparalleled support system make it a great place to tackle some of the most pressing challenges of our time with AI.

3. PARADIGMS IN CREATIVE FINANCE: BYOI -? BRING YOUR OWN IDEAS

The finance industry is more creative than ever—it's no longer just about numbers and Excel spreadsheets; it's more like BYOI - Bring Your Own Ideas. Finance has transformed from a traditionally dry and complex field into a dynamic and innovative industry, driven by technological advancements like fintech, blockchain, and AI. The rise of impact investing, cryptocurrencies, and personalized financial products has made finance more engaging and relevant to individuals' lives. Additionally, the integration of finance into pop culture and the emergence of new, creative roles have further energized the field, making it a vibrant intersection of technology, culture, and innovation. Globalization and diverse perspectives have also contributed to making finance more inclusive and adaptable. As a creative venture capitalist, the concept of raising capital from founders, as Flint Capital has successfully done, resonates strongly with my approach to building meaningful and strategic partnerships. This innovative fundraising strategy not only fosters a more cohesive relationship between VCs and founders but also plays an important role in offsetting risk during due diligence, making it a paradigm shift that aligns with my values and vision for venture capital. From the perspective of a VC, engaging founders as limited partners (LPs) is far more than a financial transaction. It represents a deep alignment of interests and trust that can significantly enhance the due diligence process. When founders, who have previously benefited from a VC’s support, choose to reinvest their gains, it serves as a strong validation of the VC’s value proposition and investment strategy. These founders are intimately familiar with the challenges and opportunities within the industry, and their decision to become investors themselves is a testament to the soundness of the firm’s practices.

Finance has been gamified, so now, anyone, can cut an edge in this space, all they needs is a great idea and some creativity…

The personal nature of my approach to venture capital, as highlighted on my website, www.paulclaxton.io , emphasizes building genuine relationships and understanding the unique needs and aspirations of each founder. By raising capital from founders, VCs not only gain capital to deploy and invest, but also tap into a network of experienced entrepreneurs who bring invaluable insights and perspectives. These founders have been through the rigorous process of building and scaling companies, giving them a nuanced understanding of the risks and potential pitfalls that new startups may face. This experience is particularly valuable during due diligence. Founders-turned-investors are uniquely positioned to assess the viability of new ventures with a critical eye, identifying red flags that might be overlooked by busy, busy VC’s. Their involvement in the due diligence process helps to mitigate risks by providing a more informed and realistic evaluation of potential investments. This collaborative approach allows VCs to make more confident and well-rounded investment decisions, ultimately leading to a stronger and more resilient portfolio. Moreover, raising capital from founders helps to create a culture of shared success and mutual support. When founders invest in helping to offset risk with a venture capital fund, starting with their own startup, they are not only seeking financial returns but are putting real skin in the game by laying a foundation of commitment and loyalty to the VC firm, and they are also contributing to the success of the next generation of entrepreneurs. This dynamic creates a virtuous cycle where successful founders become mentors and advisors, offering strategic guidance that can be instrumental in navigating the complexities of building a business. In an increasingly challenging fundraising environment, as noted in the article, the ability to attract capital from seasoned founders who value your firm’s proposition is a significant advantage. It differentiates the venture firm in the eyes of traditional LPs, illustrating a unique and effective strategy that not only strengthens the firm’s investment approach but also offsets risk through a more thorough and experienced due diligence process.

Raising capital from founders is a powerful strategy that aligns the interests of VCs and entrepreneurs while also enhancing the due diligence process by leveraging the expertise of those who have successfully navigated the startup landscape. This approach reflects the values and principles that guide my work in venture capital, emphasizing trust, collaboration, and a commitment to driving innovation and success.

SUMMARY

In the ever-competitive world and landscape of venture capital and finance, character, creativity, and strategic location are key factors shaping success. In this newsletter I discussed the importance of having character over being a character in the startup world, advocating for long-term impact rather than quick exits.

I went into highlights about California as the epicenter of AI innovation, where strategic geographical advantages, a robust research ecosystem, and a diverse population create unmatched opportunities for tech entrepreneurs.

Meanwhile, the finance industry has evolved into a creative and innovative field, driven by technological advancements like fintech and blockchain. My approach to venture capital makes you recognize and feel the value of raising capital from founders, which not only fosters deep alignment of interests but also enhances the due diligence process, leading to more resilient investments. This paradigm shift in finance and venture capital reflects my professional and personal commitment to building meaningful, lasting partnerships that drive innovation and success.

I hope you enjoyed this week's newsletter stay tuned for next Saturday's edition.

1. ) Upcoming - Stay tuned for:

-- Show release with Serg Masís on my podcast titled Explainable AI

-- Show release with Rohan Hall on my podcast titled Explainable AI

2. ) Upcoming publication

-- On IdeaScale , a well-known global innovation platform I write for

You can find out more about these by tuning into my LinkedIn profile daily and peaking my CV that is listed below from time to time. Also if you would like to be a guest on my 2 podcasts, Capital Unscripted , or Explainable AI, or if you would like to be a contributor to any of the medias I write for or am partnered with, -- includes AI Accelerator Institute , Idea Scale , or AI news -- then please reach me by inboxing me.

I hope you enjoyed this week's newsletter stay tuned for next Saturday's edition.

How to contact me:

-- Other than LinkedIn, if you want to know more about me or hear more from me you can view my CV here: www.paulclaxton.io

-- You can also schedule a meeting with me here by going to the bottom of my business card and following the instructions.

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