In the sun-drenched corridors of El Segundo, California, the venture capital landscape recently converged for a StrictlyVC event that served as a rare, candid temperature check on the artificial intelligence gold rush. As the industry grapples with meteoric valuations and the constant threat of "hyperscaler" dominance, two veteran investors—Carter Reum of M13 and Chang Xu of Basis Set Ventures—offered a blueprint for surviving what they describe as the most accelerated technological cycle in history.
With M13 overseeing $2.5 billion in assets and Basis Set Ventures managing nearly $1 billion as a specialized AI-first fund, the duo provided a sophisticated look at why this AI boom is simultaneously a bubble and a paradigm shift.
The Core Conflict: Is AI a Bubble or a Structural Shift?
The central tension of the current market is whether the astronomical revenue growth seen in AI startups—such as companies scaling from $1 million to $70 million in ARR within two years—is a sustainable trend or a fever dream.
The Argument for Unprecedented Growth
Chang Xu, whose firm was among the first to focus exclusively on AI in 2017, argues that the growth curves being witnessed today have no historical precedent. "ChatGPT going from zero to $40 billion in six months is unprecedented," Xu noted. "When you have the possibility of compounding, accelerant growth, the valuations don’t seem so crazy because you price that into the terminal value."
However, Xu concedes that the math is paradoxical. "If you price every single deal to that math, there’s no way that will work out well for a portfolio."
The Historical Lens
Carter Reum, co-founder of M13, cautions against the "this time is different" mindset. He likens the current AI fervor to the rise of the cloud, the iPhone, and even the automobile in the 1920s. "We’ve seen this before. This is steeper and faster, but the same dynamic," Reum explained. The danger, he argues, is that past cycles were defined by innovators competing against other startups. Today’s AI startups are in a "colosseum" where they must compete against the most well-funded tech behemoths in history—companies that possess the data, the talent, and the capital to replicate any feature in a matter of weeks.
Defensibility in the Age of Hyperscalers
A perennial question for founders and investors alike is: How do you build a company that won’t be steamrolled by Google, OpenAI, or Anthropic?
The "Friction as a Moat" Strategy
Reum advocates for investing in regulated industries where the barrier to entry is not just technical, but operational. He points to M13’s successful exit from a company disrupting 911 call centers as a prime example. "The hyperscalers might go there eventually, but as a few-billion-dollar outcome, they’re not going there anytime soon," Reum noted. By focusing on industries like healthcare or government infrastructure, startups can leverage the "friction" of regulation to build a protective moat that tech giants are often unwilling to navigate.
Investing Above and Below the AI
Basis Set Ventures utilizes a dual-layered investment framework:
- Below the AI: Rethinking core infrastructure (databases, version control, deployment tools) that was originally built for human developers but is now being used by autonomous AI agents.
- Above the AI: Focusing on application-layer defensibility where technical differentiation remains long-term and distinct from generic model capabilities.
The Evolution of Startup Strategy: From Microscope to Telescope
The sheer speed of the current market has fundamentally changed how founders must operate. Reum emphasizes that the modern founder must possess a unique psychological duality: "I tell every founder: you need a microscope in one eye and a telescope in the other."
- The Microscope: Essential for day-to-day execution and the tactical "domino play" required to survive in a volatile market.
- The Telescope: Necessary to track the shifting industry landscape, as "the board is changing constantly."
Xu adds a layer of distinction by categorizing markets into "Depth Markets" versus "Velocity Markets." In velocity markets, speed of execution is the only metric that matters. In depth markets—such as biotech, where a company might use transgenic chickens to manufacture proteins—the laws of nature (or biology) act as a natural brake on hyper-growth, shielding those companies from the "fast-follower" problem.
Chronology of the AI Wave: From Wrappers to World Models
The evolution of generative AI has moved with lightning speed, turning "bad ideas" into billion-dollar businesses in a matter of months.
- The Early Days (2020–2022): The industry was skeptical of selling software to Hollywood or focusing on creative AI.
- The Generative Explosion (2023): Image and video models (Dall-E, Stable Diffusion) turned previous "toy" projects into massive, scalable platforms.
- The Current Wave (2024–2025): The rise of autonomous agents and the maturation of coding assistants like Cursor, which have proven that even "wrappers" can achieve massive exit valuations if they provide enough value to developers.
"The story of VC is that it’s constantly a story of bad ideas becoming good again," Xu remarked, noting that even the most "obvious" ideas have evolved into essential infrastructure.
The Implications of the SpaceX IPO for Los Angeles
The conversation took a local turn when discussing the anticipated SpaceX IPO. For the L.A. tech ecosystem, this represents a liquidity event of unprecedented scale. Unlike previous IPOs that mostly enriched institutional investors, the SpaceX liquidity will reach a broad base of employees who reside in the region.
A New Economic Engine for L.A.
Reum believes this will trigger a "second wave" of innovation in Southern California. "The previous L.A. cycle produced things like Riot Games, Tinder, and Snap. This is a different order of magnitude," he stated. While the first wave of AI was largely concentrated in the technical hubs of San Francisco, the next wave—centered on business models, creative content, and cultural influence—is primed for Los Angeles.
The Shift from "Compute" to "Taste"
Xu concludes that the next frontier in AI is not about who has the most GPU power, but who has the best "taste." As models become commoditized, the ability to create emotional resonance and cultural connection will become the primary differentiator. "San Francisco has extraordinary technical talent," Xu noted. "L.A. has taste in spades."
Conclusion: Looking Toward the Second and Third Ripples
As the panel concluded, the consensus was clear: we are still in the early innings of the AI cycle. The most crowded and "obvious" bets have already been placed. The real opportunity, according to Reum, lies in the "second and third ripples."
"I get excited about two, three, four years from now," Reum said. "There are going to be business models and companies that we can’t imagine today. As a VC, those second and third ripple bets are the hardest ones to get right—but if you do, fewer people are thinking about it, you pay more reasonable valuations, and the ROIs tend to be much better."
For founders, the mandate is clear: survive the current noise, build for long-term defensibility, and prepare for a future where cultural intuition is as valuable as algorithmic accuracy.
