The Opportunities Costanoa Ventures Sees In Vertical AI

Editor’s word: This text is a part of an ongoing collection through which Crunchbase Information interviews energetic buyers in synthetic intelligence. Learn earlier interviews with Felicis, Battery Ventures, General Catalyst, Bessemer Venture Partners, Accel, Insight Partners, Index Ventures, Sequoia Capital, Section 32, M12, Sapphire Ventures, Bain Capital Ventures, Menlo Ventures and Scale Venture Partners, in addition to highlights from these stories from 2023.

Two years into the factitious intelligence wave, we thought it could be useful to talk with an early-stage investor within the sector to get a perspective on what it’s been prefer to put money into generative AI startups from the get-go.

Costanoa Ventures common accomplice, John Cowgill and founder Greg Sands

To that finish, we caught up with Costanoa Ventures founder Greg Sands and common accomplice John Cowgill. The Palo Alto, California-based agency invests at pre-seed, seed and Collection A, and closed on its fifth fund of $275 million (its largest), and a 3rd alternative fund of $119 million to put money into its winners — each in September.

From its first $100 million fund raised in 2012, the agency has constructed its follow in enterprise cloud-based providers leveraging knowledge and analytics.

Costanoa’s focus as we speak is utilized AI and AI infrastructure, and B2B fintech. With generative AI, “we are able to remedy issues that have been unsolvable two years in the past,” stated Sands.

Costanoa can also be doubling down on cybersecurity — because the risk occasion has elevated with AI in addition to the potential to enhance safety operations — and nationwide safety. The agency incubated Vannevar Labs in 2019, earlier than protection tech and AI have been as widespread as they’re as we speak.

New capabilities, not imagined earlier than

The developments in AI in recent times imply that by pure language processing, written language will be simply digested, consumed, organized and even reasoned with. Pc imaginative and prescient permits photos to be evaluated and understood. Mix these applied sciences, and also you begin to get some very fascinating and sophisticated outputs, Sands stated.

Going vertical

“Now we have actually solved many of the issues that could possibly be solved by that technology of expertise,” Sands stated of the SaaS revolution of the previous 20 years.

The agency believes that generative AI has now opened up vertical alternatives which may have been too small prior to now.

“The knock on vertical SaaS has at all times been: it’s a smaller whole addressable market since you restrict your self to at least one vertical, reasonably than constructing one thing that may apply to each vertical,” stated Cowgill.

The agency is trying intently at every vertical to grasp how massive it may be with the rise of AI.

In that vein, Costanoa backed Aquabyte, which offers laptop imaginative and prescient for fish farming. It additionally invested in Beacon AI for pilot help in aviation, and ForceMetrics, a service to provide first responders situational consciousness by consolidating and presenting knowledge. It additionally made a stealth funding in an organization in building allowing. Although that will appear slim, there’s a giant alternative in proudly owning an finish to finish workflow in that area.

Bullish on native AI

The massive query for buyers is: Does this vertical alternative profit present mid-size portfolio corporations embedding an API? Or is it just like the cloud and cellular period the place it was difficult for incumbents to rebuild their enterprise fashions?

“I’m extra bullish on AI native utility layer corporations than I used to be two years in the past,” stated Cowgill, who has seen firsthand how arduous it’s to combine AI and the place the worth lies.

The agency has a handful of later-stage vertical SaaS corporations working to combine AI. “The speed at which they are going to combine AI will likely be slower,” stated Cowgill. “They may really find yourself delivering totally different providers and totally different merchandise, totally different enterprise fashions.”

“The true worth in AI comes when you’ll be able to personal an end-to-end workflow,” he stated. “That is the thought of an agent transferring from simply making use of AI, pointing at one thing and saying, ‘search throughout it with AI, summarize with the AI’ — to personal a job to be accomplished with AI. Getting brokers to work is extremely tough.”

Nuance in picks and shovels

Costanoa has made a number of bets in AI infrastructure. It invested in Delphina, creator of an AI junior knowledge scientist to help groups. It additionally backed Rerun.io, an open supply visualization stack for multimodal knowledge together with audio, picture and video, and OpenPipe, which is used to fine-tune fashions.

Nonetheless, Sands famous the infrastructure for mannequin administration broadly has not grown as a lot as was anticipated 18 to 24 months in the past, partially on account of the truth that corporations in utilized AI should not managing fashions themselves, however buying from hyperscalers.

‘Issues that matter’

However some issues haven’t modified.

In a 2018 weblog submit “What the $%&* is Applied AI?” Sands famous that AI doesn’t exchange the necessity for “wonderful product administration” and that “knowledge is as vital because the algorithm.”

Via the agency’s 12 years, Sands stated he has targeted on everlasting rules: “discover extraordinary folks, pour time and vitality and functionality into them in order that they’ve the perfect likelihood of success,” he stated. “Choose issues that matter — each applied sciences that matter and issues that matter.”