The challenge to big tech in the AI war

Last week, we profiled the heavyweights whose gigantic data troves and colossal spending make them the players to beat in the war to dominate the next generation of tech — in artificial intelligence, virtual and augmented reality, to name a few. But some venture capitalists are betting on scrappy startups with a long-shot potential to upset the incumbents' plans.

The giants start with an advantage: Google, Facebook, Amazon, Apple and Microsoft, not to mention China's Alibaba, Baidu and Tencent, are investing in these future technologies like they are countries (see chart above). But outsized victory does not go only to the best technology: An ingenious business model can be a tremendous equalizer.Think Bill Gates and Marc Benioff: Gates convinced consumers to pay for software; and Salesforce's Benioff persuaded companies to trust their critical data to his servers. The economics of software "came out of hard-fought battles by people who figure out how to use the economic characteristics of software to their advantage," says James Cham, of Bloomberg Beta, the VC firm.Why we don't yet know who will win: R&D spending is an important indicator of investment in unproven technology. So is the troves of data used to train the software models that power artificial intelligence, and in turn generate more data as they learn to recognize faces, learn languages and predict our next moves.

• But cash and data aren't necessarily definitive: We don't know how effectively the incumbents are doling out their spending in future technologies.
• And small and large companies behave differently: Big companies tend to bolt new products to existing platforms, while smaller ones can create an entirely new platform that can unseat the established players, says Silicon Valley lawyer Gary Reback, of Carr Farrell.
• The big companies themselves push back: They say the market is open, pointing to high level of VC investment in startups working on AI.

The Gates and Benioff examples are instructive. "The innovation of these business models are taken for granted because we get distracted by technical wizardry," Cham tells Axios. There are spaces that "might be ripe for unsettling." He went on:

"So we need to find new companies that aren't just building great software, or executing against newer technical architectures. Instead, we are looking for startups that are answering questions that big companies can't deal with. I'm looking for the next fierce founder who deeply understands the technical aspects of AI, while being economically savvy enough to create a new way of doing business."

This threat is not lost on the big guys: Understanding that they could be upended by a startup with the next big idea, they are acquiring startups with unique expertise. In May, Google launched a VC unit to invest in AI, its first effort dedicated to a specific technology.

And VCs may be helping only so much: Startups are aggressively going after markets like AI — and investors are pouring money into them, as Axios reported last week. But Reback says they are having a harder time getting second-round investment as they mature. "That's poison to us because that's where the growth comes from," he said. "If smaller companies can't get funding and can't challenge these guys, they just won't be able to seed the market."