Sequoia Sees Bigger Money in AI-Linked Software Than Models

(Bloomberg) — Venture capital giant Sequoia Capital believes the bulk of billion-dollar companies created in artificial intelligence will come from making applications rather than building models, although it is investing in both, partner Pat Grady said at a conference Wednesday.
Speaking at a Goldman Sachs Group Inc. event in San Francisco, Grady said the firm had put about $150 million into companies building foundation models, such as Sam Altman’s OpenAI, Ilya Sutskever’s Safe Superintelligence Inc. and Elon Musk’s xAI. These models, which serve as the building blocks for products offered by many of the latest AI companies, are extremely expensive to build.
Given the more than $55 billion that Sequoia has under management, it’s spent relatively little on such endeavors, Grady acknowledged.
“We have an order of magnitude more dollars invested at the application layer, even though the revenue being generated at the application layer is a lot less,” he said, referring to AI companies that build products that use the models in novel ways. But in AI, “it seems to us that the application layer is where the largest number of billion-dollar-plus companies is going to come.” Grady didn’t provide a dollar figure for what Sequoia had spent on other AI companies.
One factor affecting the outsized spending around AI overall is what he called the “wowed-by-science effect,” where investors tell themselves a startup is bound to do well because “this stuff is so cool. These people are so smart.” Sequoia tries to avoid making those assumptions, he said. 
He also talked up the forthcoming release of OpenAI’s Strawberry model, saying it was “pretty darn good.” 
Grady has invested in AI firms such as Harvey, a legal service, and Notion Labs Inc., a productivity tool.
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