#39 AI Takeover & Impact on VC Funds

Hi Everyone! 👋

Welcome to the new members of @TheFundCFO crew! Every [week] or so (#goals), we’ll bring you actionable tools, real-world experiences, and insider insights for #VC CFOs and fund managers, #LP investors, and general industry enthusiasts/people who want to learn :).

Our recent post “#31 VC Fund Model & Budget - Free Download” was a huge hit - widely shared and downloaded. Check it out and please share your feedback!

Artificial Intelligence Headlines

AI (“Artificial Intelligence”) continues to dominate the headlines across the VC and technology industries, with potential impacts for many others. Earlier this week, Google lost $100B of company value as its Chatbot Bard made a factual error during its first live demonstration. Ouch!

Meanwhile, shares for Microsoft, Google's rival, rose by 3%. Microsoft announced this week that it would incorporate ChatGPT into products like its Bing search engine. The company has invested $10 billion into OpenAI, the start-up that created ChatGPT.

Others taking unique approaches. ChatGPT parent OpenAI faces a blockchain rival as a new NFT project creates 3D avatars from text. Polygon is working with Alethea AI to launch CharacterGPT, an artificial-intelligence-powered non-fungible token (NFT) project that describes itself as "the world's first multimodal AI system."

In an introductory video, the brand says users will be able to type in text to generate responsive characters with "unique personalities, identities, traits, voices, and bodies." Users can mint the NFTs at mycharacter.ai.

What This Means for VC Funds & Their Investment Strategy

To better understand how VC’s investing in early-stage companies are thinking about AI and what it means, we turn to a recent article: “Desperate Times, Platform Shifts & New Narratives.” In this article, Jeff Morris Jr. notes that “OpenAI & ChatGPT have traction at the very moment when venture capitalists need a platform shift.”

“ChatGPT is a groundbreaking early product with boundless use cases across content creation, media, art, science, programming, and academia.

What is less clear is whether ChatGPT and generative AI will be a product feature for startups and enterprises, or the platform shift by which multi-billion dollar venture scale businesses will be built.

For now, we should remember the lessons of the last two years, manage our expectations, and appreciate that a new product has captured consumer imagination in a moment of market distress and software pessimism.”

Impact on VC Legal, Finance, & Operations

Earlier this week, Chris Harvey released an article titled “Three Shifts in AI: A Deep Dive Into Artificial Intelligence, Fund Law & Life in the Age of AI. He goes deeper on what’s happening in tech and law as it relates to venture funds.

First, let’s touch on the hype and why it exists. “In November 2022, OpenAI released ChatGPT for free. It broke world records, and then itself, after demand surges. ChatGPT reaches 1 million users in 5 days:”

Next, let’s get into the specifics of VC fund legal. From Chris Harvey: “ChatGPT seems to understand basic venture fund law. But what if it’s tricked?” He couldn’t do it when he tried! “Not only did ChatGPT give me the correct answer (“this structure is not legally possible”), it also cites the law. Now, I’m impressed.”

For VC fund managers and professionals, I highly encourage you to check out his posts, which share more detail on the following structures. Chris’ takeaway is that you’ll still need a lawyer to navigate the following, but perhaps AI will streamline the process and time!

Focus on the Investment Company Act (ICA), not the Securities Act:

There are three relevant limitations under the ICA, including two in Section 3(c)(1):

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”