Why the smart money is betting beyond AI models

This article summarizes an episode of Sourcery’s video series featuring Carter and Courtney Reum, co-founders of M13.

Courtney Reum (left) and Carter Reum (right), co-founders of M13/ Photo credit: Carter Reum

M13 is one of Los Angeles’s most prized early-stage venture firms, managing US$1.9 billion in assets across three funds. The firm has a track record of over 200 direct investments, 54 exits, and 15 unicorns, including notable portfolio companies like Lyft, Pinterest, and Ring. However, despite the current industry-wide focus on foundational AI technology, M13 is taking a different approach.

Co-founders Carter Reum and Courtney Reum argue that the best opportunities are not in building new core AI technology, but in the tools built on top of it. Their strategy shifts capital away from popular AI language model builders and toward companies that use AI to solve real-world problems.

A divided market

The investment world has split into two types of funds that work in different ways. Large investment firms have to invest billions, so they overpay for well-known companies just to spend their money. Smaller funds, by contrast, are not able to do that and have to find good deals.

Courtney notes, “We have to be really careful because [multi-stage funds] can afford to overpay… And we can’t really afford to do it. So, we have to be really disciplined.”

The problem with safe bets
But discipline, in this case, does not mean playing it safe. For smaller funds especially, aiming for modest returns can actually be a strategic mistake.

In startup investing, the downside is capped at the capital invested. That means targeting a small return carries similar downside risk as targeting a large one, but without the potential for an outsized reward.

For that reason, Courtney warns against conservative bets. “I can show you something I think will be 100x with the same odds,” he says, adding that big, uneven wins are the only way to get the best returns.

Finding value beyond the hype

This philosophy also shapes where M13 chooses to invest in the AI cycle. While many investors focus on building core AI systems, the firm looks for opportunities in the indirect results of the technology.

Carter says an investor’s job is to find the later effects of a new technology. He compares it to the car industry. “In the 1920s, there was this really cool technology. It was the car,” he notes.

“So, you could choose to invest in car companies. But do you know who made a lot of money? It was people who bought real estate in LA … people who bought gas stations.”

He sees the same thing happening today. The race to build the next large language model (LLM) is just the first wave. It creates many business opportunities in other markets that support it.

“Those are the second and the third ripples from the technological innovation,” he adds.

Competing with big companies

Rethinking the value of an idea