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Over the last year, we’ve watched the venture capital world turn upside down over new technology—specifically the release of generative artificial intelligence and the rapid development of foundation models like Chat-GPT from Open AI, Gemini from Google, and Claude from Anthropic. These developments are the building blocks for a new innovation cycle where we see remarkable opportunities for startup investors to back innovative young companies.
The Two Layers of Every Innovation Cycle
In the past 25 years, we have witnessed two transformative innovation cycles that revolutionized industries and reshaped our world. These cycles allowed groundbreaking technologies to flourish and created immense value for early investors.
Now the question is how can you separate a true innovation cycle from technological changes we see on a regular basis? The tell-tale sign is that every innovation cycle involves two clear layers.
The first is the platform layer where a disruptive new technology changes the way we access and interact with information, on a large scale.
The second is the application layer. New companies emerge to build on top of the platform layer and deliver value to end users in completely new ways. It’s the application layer where you find the greatest opportunities.
The First Innovation Cycle: Home Internet Access
The Internet Access innovation cycle occurred in the late 1990s and early 2000s, marked first by dial-up and later by high-speed connections inside the home. The platform layer was the wires and fiber provided by big companies like Verizon, Comcast, and AT&T who made access to the Internet readily available. That access powered the application layer, where companies like Google, Facebook, and Linkedin reshaped the way we search for information and connect with others.
And while Verizon, Comcast, and AT&T clearly benefited from providing home access, the biggest winners were the early investors in the groundbreaking applications. Top examples of value created during the first cycle include:
The Second Innovation Cycle: Mobile Access
The mobile access innovation cycle came along roughly ten years later with the launch of the smartphone. Apple was the primary driver of that innovation, bringing the power of the internet and more to a device you could access at any moment.
At the application layer of this second cycle, startups emerged to change the way we connect and communicate. Uber made it possible to get a ride anywhere at any time. Slack revolutionized the way teams work together at the office. Instagram was the first to add a visual layer to our mobile communication.
Again, the value created by these applications, particularly for their early investors, was enormous.
The Third Innovation Cycle: Intelligent Access
The platform layer for the Intelligent Access cycle is built on generative artificial intelligence. The Large Language Models (LLMs) we mentioned earlier are able to understand prompts and generate responses in a human-like fashion.
What’s most exciting as an investor is that the application layer for this revolutionary technology is wide open. While we’re already seeing chatbots that can answer questions, write emails, and help plan travel, the major players like Microsoft/Open AI and Google are now opening up their tools via API. This step is going to make application development easier, much like we saw Apple do with the App Store.
In terms of scale, the size of the generative AI space is expected to go up 20X in the next ten years. The technology applications are expanding from consumer use into fields like biotech, space, finance, education, and more being developed every day.
The Race to Realize Value
The timing of value accrual during these cycles is particularly noteworthy. The most substantial gains are typically realized from companies founded within the first two to three years after the disruptive technology emerges. That’s why the coming year is so critical for startup investing in the AI era.
Now here’s the best news of all.
During the first two cycles, ordinary investors had little to no access to these promising startups. For most, it was prohibited by law. And even for those who had the means to invest, the minimum buy-in to a venture capital fund was typically $250,000 or more.
Now thanks to the work of teams like Republic, everyone can participate in this third innovation cycle with a minimum investment level that’s come down to $500 or less.
To take full advantage of these new opportunities, Republic is launching a new initiative later in the coming week. It’s going to focus on these new startups and the growing potential they offer. Look out for more details on how you can take part, and get closer than ever to our top deal makers, on Monday.
