Why Consumer AI Startups Struggle to Last - VCS Insights

The Current Landscape of AI Startups and Consumer Adoption

Despite the significant surge in generative AI over the past three years, the majority of AI startups continue to generate revenue primarily through business-to-business sales, rather than direct consumer engagement.

While widespread consumer adoption was quickly observed with general-purpose Large Language Models (LLMs) such as ChatGPT, many specialized consumer applications leveraging GenAI have yet to achieve significant traction.

Challenges Faced by Early AI Applications

Chi-Hua Chien, co-founder and managing partner at Goodwater Capital, noted that initial AI applications focused on video, audio, and photo manipulation were initially compelling. However, the release of models like Sora and Nano Banana, alongside the open-sourcing of video models from China, significantly altered the competitive landscape.

Chien draws a parallel to the early days of the iPhone, specifically the flashlight app, which gained initial popularity as a third-party download before being natively integrated into the iOS operating system.

The Need for Platform Stabilization

He posits that, much like the smartphone platform required a period of consolidation before groundbreaking consumer applications emerged, AI platforms necessitate a similar phase of “stabilization” to foster the development of enduring consumer AI products.

Chien believes the current moment is akin to the mobile era of 2009-2010, a period that witnessed the birth of prominent mobile-first consumer businesses like Uber and Airbnb.

The recent advancements with Google’s Gemini achieving technological parity with ChatGPT may signal the beginning of this stabilization period.

Consumer AI: An “Awkward Teenage” Phase

Elizabeth Weil, founder and partner at Scribble Ventures, shares Chien’s perspective on the nascent stage of GenAI, characterizing the present state of consumer AI applications as being in an “awkward teenage middle ground.”

Beyond the Smartphone: The Search for a New Device

What factors will be crucial for the maturation of consumer AI startups? A potential catalyst could be the emergence of a new device that transcends the limitations of the smartphone.

Chien argues that a device accessed hundreds of times daily, yet only capturing a small percentage of a user’s overall experience, is unlikely to fully unlock the potential of AI’s capabilities.

Weil concurs, suggesting that the smartphone’s inherent limitations, particularly its non-ambient nature, hinder the reimagining of consumer AI products. She indicated her iPhone to the audience, stating she doesn’t believe they will be building for this platform in five years.

The Race to Develop New Personal Devices

Both startups and established technology companies are actively engaged in developing new personal devices intended to supersede the smartphone.

Notable efforts include a rumored “screenless,” pocket-sized device being developed by OpenAI and former Apple design chief Jonny Ive. Meta’s Ray-Ban smart glasses, controlled via a wristband recognizing subtle gestures, represent another approach. Numerous startups are also exploring alternative form factors, such as pins, pendants, and rings, aiming to integrate AI in novel ways.

Potential Consumer AI Applications

However, not all consumer AI products will necessitate a new device. Chien proposes a personalized AI financial advisor, tailored to individual user needs, as a viable offering.

Similarly, Weil anticipates the widespread adoption of a personalized, “always-on” tutor, delivering specialized instruction directly through smartphones.

Skepticism Towards AI-Powered Social Networks

Despite their enthusiasm for AI’s potential, both Weil and Chien expressed reservations regarding the emergence of several stealthy AI-powered social network startups.

Chien highlighted that these companies are constructing networks populated by thousands of AI bots interacting with user-generated content.

“This transforms social interaction into a single-player experience. Its effectiveness is questionable,” he stated. “The core appeal of social networking lies in the understanding that genuine human connections exist on the other side.”