Navigating the AI Boom | Startup Finance Basics w/ Kruze's Scott Orn

Kruze COO, Scott Orn, joins Jason (0s)

• The program features startup basic segments to address frequently asked questions, with 20,000 startups applying for funding from the firm every year through launch.co/apply. (13s)
• The firm meets with around 5,000 of these founders briefly and invests in about 100 of them annually, resulting in repeated questions about cap tables, accounting, and human resources. (30s)
• The program has a resource called "This Week in Startups Basics" where viewers can find videos addressing these basic questions, covering the fundamentals of startup finance. (43s)
• Scott Orn from Kruze, a partner for finances, joins the program to discuss the basics, bringing his expertise as a CFA and COO of Kruze. (54s)
• The current state of the startup finance industry is booming, with Kruze being a key player in helping navigate this environment. (1m5s)

Unique aspects and dynamics of the current AI boom (1m6s)

• The current AI boom is significant, with venture capital investing being up for the year, despite initial expectations of a decline (1m11s).
• A substantial portion of the investment is attributed to mega rounds, particularly in AI, which requires large amounts of capital and highly paid developers to build and maintain (1m27s).
• The high infrastructure costs associated with AI companies, including hardware and talent acquisition, contribute to the substantial investment (1m50s).
• A notable example of the high demand for AI-related hardware is the story of Elon Musk, Larry Ellison, and Jensen Huang begging Nvidia for H100s, highlighting the intense competition for resources (2m1s).
• Kruze's clients, 175 of which are AI companies, have raised $2.5 billion this year, with $1.5 billion attributed to AI companies, accounting for more than half of the total funding despite making up only 20-25% of the clientele (2m37s).
• AI companies have infrastructure costs that are approximately 2x higher than typical SaaS companies, primarily due to the expensive new hardware layer required for AI development (3m5s).
• The current AI boom marks a shift from the previous compute-light ecosystem, where storage and bandwidth were not significant concerns, to one where hardware and infrastructure costs are substantial (3m23s).

AI startup revenue, costs, and growth rates vs traditional SaaS (4m11s)

• AI startups are seeing significant revenue growth, with people willing to pay for AI solutions despite the high costs, which is in contrast to the crypto space where there was a lot of vision but not a lot of application (4m11s).
• AI companies are growing 60% faster than traditional SaaS companies, based on data from 800 companies, with one in four being AI-based, and this growth is seen in companies with over $1 million in ARR (5m25s).
• This growth is impressive and is a key reason why investors are happy to invest in AI companies, despite the high capital costs (5m49s).
• The winners in the AI space are starting to emerge, and these are typically the companies that are growing the fastest, which is what gets investors excited (6m18s).
• AI companies are providing value to customers by saving them time and money, with an example being Podcast AI, which saves 10-20 hours of time per month and charges $500 per month, providing a good arbitrage between the cost of human editors and the cost of AI solutions (6m34s).
• The benefits of AI solutions go beyond just cost savings, with cognitive relief being a key benefit, as seen in the example of Podcast AI, which takes care of tasks such as transcribing episodes and making clips (7m47s).
• The use of AI solutions is driving efficiency and is what drives the US economy, with AI companies providing value to customers by saving them time and money (7m36s).

AI tools and their impact on productivity and labor efficiency (8m12s)

• The current AI boom is still in its early stages, with new ideas and applications emerging, and this trend is expected to continue over the next two to three years (8m16s).
• The shift to cloud computing in the early 2000s is comparable to the current AI boom, as both have significantly impacted the way businesses operate (8m32s).
• Automating tasks can lower stress and is considered virtuous, as it reduces the likelihood of human error and increases efficiency (9m16s).
• A significant portion of grunt work, estimated to be around a third, is being automated, with tools like Grammarly, ChatGPT, and Claude being used for tasks such as proofreading (9m36s).
• AI-powered tools are also being used to compose emails and deal memos, reducing the need for manual proofreading and saving time (10m2s).
• The use of AI has improved the writing skills of team members, with even those who were previously considered "okay or bad" writers now being able to produce high-quality content (10m32s).
• ChatGPT has been integrated into the company's Slack channel, allowing accountants to quickly access answers to common questions and improving response times (10m47s).
• This integration has also relieved stress and improved the company's ability to respond to clients, with the potential to multiply this effect across 800 clients and numerous daily questions (11m28s).
• The company does not charge for this service, but it has become a valuable tool in improving their operations and client response times (11m34s).
• The use of AI tools, such as chat GPT 40, is becoming increasingly important for professionals, with the gap between those who use these tools and those who do not growing wider (11m35s).
• To stay ahead, it is recommended to make AI tools the default opener on web browsers, allowing for instant access to information and research capabilities (11m58s).
• The use of AI tools can greatly reduce the time and cost associated with tasks such as research, with the potential to replace the work of associates and save companies money (13m36s).
• The integration of AI tools into daily work can also lead to increased productivity and efficiency, with the ability to access information and complete tasks in real-time (13m13s).
• Companies such as Perplexity are emerging as alternatives to traditional search engines like Google, with some people using them as their default search engine (14m8s).
• The use of AI tools is becoming more prevalent, with the potential to revolutionize the way people work and access information, making it an exciting time for professionals (14m23s).
• The ability to access information and complete tasks quickly and efficiently is becoming a key differentiator for professionals, with those who do not use AI tools at risk of falling behind (13m40s).

Accounting challenges and operational issues in AI startups (14m27s)

• The accounting for AI companies involves significant expenses, including charges from cloud providers such as Amazon, Microsoft, and Google Cloud, which can be substantial, with some companies spending $500,000 to $1 million per month on cloud infrastructure (14m27s).
• The expense accounting for these companies is crucial, as the invoicing from cloud providers can be inaccurate, leading to double invoicing or missed bills, which can materially affect a company's burn rate (15m23s).
• AI companies are doing spend analysis to track their expenses, as missing a million dollars in expenses can dramatically impact their cash runway (15m56s).
• Big AI companies are spending a lot of money with other companies, such as Anthropic or Open AI, and these contracts are often negotiated at the executive level due to their large size (16m17s).
• The spending on hosting, computer, and software as a percentage of revenue for AI startups is over 50% and has been growing since 2023, which is significantly higher than the 18-19% spent by standard SaaS companies (16m46s).
• The high expenses associated with AI are due to the constant need to solve new problems and find new applications for the technology, leading to a paradigm shift in how companies approach problem-solving (17m19s).
• The demand for compute power is high, and companies like Cor Weave are constrained by their capacity, giving them pricing power, which is reflected in the venture landscape where companies need to invest more to get started (17m40s).
• The venture landscape for AI companies is characterized by a deeper J curve, where companies need to invest more upfront to achieve growth (18m0s).
• AI companies are growing revenue 60% faster, but it's uncertain if this growth rate will be enough, and they may need to grow 200% faster than a normal SaaS company to be successful (18m12s).
• These companies have diseconomies of scale, which can be concerning for investors and industry workers, but it's expected that entrepreneurialism and capitalism will drive costs down over time (18m23s).
• As AI is used in many different places, it's essential to break down costs into line items, such as costs for podcasting, media business, legal, accounting, and development, to accurately track expenses (18m48s).
• Breaking down costs is crucial for startups, especially for research and development (R&D) and cost of goods sold (COGS), as venture capitalists care about gross margin and R&D tax credits (19m29s).
• R&D tax credits can provide significant benefits to tech startups, with some companies receiving $250,000 to $500,000 back as a payroll tax offset, making it essential to accurately track and claim these expenses (20m10s).
• The J curve concept, which illustrates how performance or shift might initially lead to instability or dissatisfaction before realizing benefits and stability, can be applied to various fields, including politics and business (20m47s).
• In business, the J curve represents the initial financial losses and investment in R&D, production, and brand building, followed by recovery and growth, as seen in companies like Tesla and Uber (21m11s).
• Expanding a business globally can be costly due to subsidy subsidization, legal, and regulatory challenges, which may lead to financial deficits, but can potentially return if managed properly (21m34s).
• Having a reliable partner, such as Kruze, is essential for startups to navigate financial and accounting challenges, as they provide valuable support and guidance (21m44s).
• Mike Saino, a partner in the business, emphasizes the importance of being frugal and not wasting resources, which is why he asks tough questions about accounting and finance (21m54s).
• Kruze's expertise in accounting and finance makes them a great partner for startups, as they can help address complex financial issues and provide support when needed (22m21s).
• Many startups fail due to operational issues, such as legal, accounting, and HR problems, which can be mitigated by having a reliable partner like Kruze (22m35s).
• It's estimated that four out of ten startups fail due to operational issues, which can be self-inflicted and preventable with the right support (22m58s).
• Kruze Consulting is a recommended partner for accounting and finance, and Becky DeGrano at Wilson Sonsini can provide support with legal issues (23m8s).
• Startups can reach out to Scott at Kruze Consulting (scott@kruzeconsulting.com) for guidance and support, and can also visit weenstartups.com for more information (23m22s).