At a recent StrictlyVC event in Los Angeles, investors Carter Reum of M13 and Chang Xu of Basis Set Ventures shared how they approach AI startups in a market defined by rapid change, rising revenue, and shifting technical boundaries.
Xu argued that the current AI cycle is unusual because growth can scale at extraordinary speed, making some valuations feel justified while also creating pressure to separate durable businesses from short-lived momentum. Reum added that this moment resembles earlier technology waves, but with one major difference: today's startups often compete not only with each other, but also with the largest and best-resourced technology companies in the world.
The two investors said they focus on companies with clear technical differentiation and strong long-term positioning. One framework they highlighted is investing "below the AI" in infrastructure such as databases, deployment tools, and version-control systems adapted for agentic software, and "above the AI" in applications that can defend their value through specialization, regulation, or deep workflow integration.
Reum pointed to regulated sectors such as healthcare and public-service software as examples of markets where friction can become a moat. Xu emphasized that the pace of change means founders need to think both tactically and strategically, balancing daily execution with a broader view of where the market is heading next.
Both investors also noted that the most interesting opportunities often begin as ideas that look uncertain from the outside. They cited creative AI, generative media, and new tools for software development as examples of categories that quickly evolved from experiments into major businesses. Reum said the biggest opportunities may still be ahead, especially in the second and third waves of AI innovation.
The discussion also turned to Los Angeles, where a future liquidity event tied to SpaceX could inject fresh capital into the local ecosystem. Reum suggested that such moments often spark a new generation of startups, while Xu argued that the next frontier in AI may be less about raw compute and more about taste, culture, and emotionally resonant storytelling.
As AI matures, the most valuable companies may be the ones that combine speed, technical depth, and cultural insight in ways the market is only beginning to recognize.