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By Damon Kitney
Paul Bassat calls it “the most significant tech era of our lifetimes”.
The launch of ChatGPT by OpenAI on November 30 2022 has heralded a new dawn for technology companies, with all the exciting but daunting consequences.
As profound were the implications of the rise of the internet for society in 1994, the rise of Artificial Intelligence (AI) has even greater consequences for mankind.
Yet unlike the rise of the internet, which destroyed the business models of many incumbents - for example, the classifieds model of newspapers by upstarts such as SEEK, Carsales and REA - Bassat believes there will be both winners and losers among incumbent businesses from the AI revolution.
“It's going to be good for some incumbents, it's going to be terrible for others. It's going to be good for some disruptors, others are going to find it hard to get a competitive advantage. It is a little bit unclear how much value is going to be created in the vertical and horizontal layers. Certainly it is going to be very, very good for the infrastructure folks. But there's probably not going to be many of them. So you've got all these different questions about how and where value is going to be created, what business model is going to emerge,” he told the annual Square Peg Investor Summit dinner.
“You can apply some theories that work really, really well with traditional SAS business models. A lot of vertical applications in AI look pretty similar in terms of business models to software as a service (SAS) business models.”
For those that can back the right horse, the businesses and fortunes of the future will be made in the coming years.
Since 2016 Square Peg has been making investments in many AI-first business models. Almost a quarter of it current portfolio companies are using AI in a fundamental way.
“That is why it is a really fun time for us,” Bassat said.
“We are going to earn our pay much more in the next five years, where you will see this rise of a new era where great companies are going to be founded. There will be lots of value destruction as well. There will be interesting questions around our existing portfolio companies, which are going to be winners and which are not.”
Bassat has talked previously about the good and bad decisions Square Peg made during the heady 2020-2021 period where he acknowledges “our cadence got a bit faster in terms of investing.”
“But I think one of the things we did pretty well was understanding the difference between a good business and a bad business. We were in a market where essentially, everyone was incentivized to grow their top line as fast as possible.”
Piruze Sabuncu, who built and scaled the Stripe team in Southeast Asia as its first employee in the region before joining Square Peg in 2020, told the Investor Summit dinner that the current tough environment for technology companies required them to be closer to their customers than ever before.
“What do they want? What is the pain point? You can’t just throw things out there and hope some people are going to come. So in a way, these current founders will build better businesses and these companies will be stickier, the solutions will be stickier,” she said.
“There is now less experimentation but smarter experimentation, that is how we are advising our founders. The founders need to be more customer centric compared to before and they need to be more long term-oriented because they are not going to see the immediate results.”
In such an environment, she believes “blameless postmortems” are critical.
“We did a post mortem at Square Peg after something we just did last week and we were quite blameless. But reflecting upon it 24 hours later, I felt it wasn't blameless enough,” she said.
“Because there is a format for it. It really opens people up to just state the facts. ‘This is what happened and then this is what happened.’ Then you just look at it and say, ‘Oh, that's where we made the mistake. So what would we do differently? Then you record it, and you share it with the whole organization. In Singapore, we do a lot of these in our small unit.”
Bassat describes feedback for founders as a gift when it is given with the right intention.
“As long as that feedback is coming from a good place and as long as the person giving it wants the person receiving it to learn, people are pretty receptive to it.”
He said Square Peg was currently over-indexing on the resilience of its founders, which always gets tested in difficult environments.
But he said investing for the long term should remain the fundamental goal.
“You should be making exactly the same decisions in a downturn. If you are trying to create value 10-15 years from now, it really doesn't matter what state the economy is in today, and what it is going to be like for the next six months, whether it's booming, or whether it's crap,” he said.
“The macro environment is essentially irrelevant to the way you are running a business if what you are trying to do is create value 5,10, 20, 30 years now.”
After more than a decade in business, he said Square Peg was now much more battle-hardend than when it started in 2012, which would stand it in good stead to succeed in the challenging years ahead.
“I think we've achieved a lot in 11 years. There's some things we've done along the way that I think if we'd done them differently, maybe we could have got to this point in five, six or seven years. But I think we've got these remarkable foundations, I think we've got an incredible team, a group of people that I'm incredibly proud of working with,” he said.
“I think we've got the makings of continuing to build and grow and become better and I think we need to become a lot better. Because all the people around us that we are competing with are getting better as well. So that is very exciting.”
