Chi-Hua Chien saw Facebook coming — and now he says the real AI winners won’t sell AI

Qi Huaxin has spent more than two decades as a venture capitalist, but he thinks like a cultural anthropologist. As a co-founder of Goodwater Capital, a firm focused exclusively on consumer and consumer technology, he has built a portfolio spanning entertainment, healthcare, fintech, and live experiences – with investments in companies like MIDI Health, Fever, and Monzo. He was also, as a 27-year-old fellow at Accel, the person who initially founded a six-person company launched out of Harvard called The Facebook.

This ability to read human behavior at scale says it all, from his view that Americans will never trust a single app with their social lives and money, to his belief that the gap between the most advanced AI model and what you can run on your phone — once as much as two years — will shrink to three months within the next year.

These days, he’s also willing to say out loud what many in venture capital only think about: that the commoditization of the model layer is already underway and that the biggest winners in the AI ​​era won’t be companies selling AI at all.

We talked last week. This interview has been edited for length and clarity.

More founders and investors have publicly shared their complaints about venture capital firms recently. What has changed?

It’s part of the simulation of it all – you see what’s happening on the political side trickling down to the business side, and it may also be a sign of some peak in the market. The reason you’re seeing some of these outspoken investors speaking out more publicly is because venture firms have largely vertically integrated, so the really big firms have enough capital that they’re not necessarily looking for syndication partners. There used to be a nicety about wanting to maintain good relationships with other co-investors, because you have to work with them at different points along the line. As companies have become larger and more vertically integrated, this need has become less.

What about “fast follow-on” rounds – where companies invest a large portion at one valuation and a smaller amount weeks later at a much higher valuation, making the headline number look more impressive than it really is? Is this really new? How common is it?

I think it’s been going on for some time. The best companies raise back-to-back rounds very quickly – there may only be three to six months between rounds now, and valuations change very quickly… Valuations are marketed very aggressively as a way to demonstrate market leadership, attract talent, and perhaps eclipse competition. There will likely be some element of froth, because what these rapid financings demonstrate is that there is much more demand than supply. An investor can come in, set the price, complete the financing, and a few weeks later there is still excess demand — and the company can immediately price a new round at a higher price.

I have argued that infrastructure companies have become commoditized and applications capture most of the value over time. Are we really seeing this this cycle?

If you look at the PC cycle, the web cycle, and the mobile cycle, they all follow fairly consistent patterns. The infrastructure market capitalization actually peaked in 2000—but 25 or 26 years later, in nominal dollars, the market capitalization of infrastructure companies has never surpassed that peak in 2000. In the Web era, new entrants to infrastructure have generated $400 billion in new market capitalization. App companies generated $3.1 trillion, or 88% of the new value. In the mobile era, it’s very similar: infrastructure generated about $700 billion, while app companies generated $3.7 trillion. Companies like Netflix, Spotify, Meta, Uber, and Airbnb.

and [last week] I saw something interesting: Google announced that its AI subscription product is lowering the price from $7.99 per month to $4.99 per month and doubling the storage space. We are already in an era of price competition – and companies like Google, with structural advantages in vertical integration and distribution, can begin to bundle and compete on prices for the average consumer.

You keep coming back to the customization as a line through. Is this what separates the next wave of winners?

Hyper-customization is certainly key across the line, so what does customization give you? If done right, it gives you higher customer satisfaction, deeper engagement, and higher rates per user (ARPU) over time.

We have entertainment companies in our portfolio – companies like Triumph, Ritten and Flow GPT – where the customer doesn’t say: “This is an AI application.” They say it is an entertainment app. These companies are going to 100 million, 400 million, 600 million of ARR very quickly, at great margins, because AI makes the experience more customizable and more personalized — but it’s not the core capability that they’re selling.

We also have a women’s health company called Midi Health. One of the primary limitations in women’s health is that there are not many providers well trained in hormone replacement therapy for premenopausal women. Using AI, they are able to dramatically expand care and treat hundreds of thousands of patients who would otherwise be unreachable. They can do this cost-effectively, expanding access to a market where supply was previously limited. You can move forward through each category with limited supply where human expertise is the bottleneck.

How far are we from AI that feels truly personal and ambient?

I don’t think we’re very far away at all. You can now run AI models locally on your phone that are almost as good as the best models they were six months ago – and that difference is shrinking. Going back a couple of years, the gap between what you could run on-premises and what was in the cloud with frontier models might have been 18 to 24 months. It has now been six months. It will likely be up to three months by this time next year.

What we don’t have yet are well-defined use cases. You’ve seen this in mobile – when the iPhone launched in 2007, people pretty much thought all web applications would be ported to mobile. It takes time for entrepreneurs to navigate what is possible now.

What MBA students do, if you extrapolate from how they work and what they do, is basically two things: they enable you to process large amounts of context and understand everything, and they allow you to do customization down to the individual, cost-effectively, with a feedback loop that makes the product better and better over time.

I’ve watched Facebook try and fail for years to create a super app. Why are financial services and social entertainment so difficult for American consumers to combine?

They’ve had a few shots on target – Facebook Credits, which launched in 2009… Facebook Pay, Libra… they’ve never been able to pull off a real great app. I think people have an intuitive perspective on trust, and there is a trust gap between entertainment and social products, commerce, banking, and financial services – especially in the Western world.

There is a seriousness to financial transactions that is very different from the banality of social media. And don’t get me wrong – this nonsense has created a company worth over a trillion dollars. But financial services are actually the exact opposite: while the public has a very long time and relatively low monetization, financial services transactions have a very high monetization and relatively low time. You don’t want to spend time on your banking app. You want to make and complete transactions — but with extremely high confidence in the security and reliability of that transaction. It is very difficult to exceed these psychological expectations from customers.

Are you betting on people craving personal connection as a counter-reaction to all of this?

We really believe in this. What do people crave in a world where there is an endless supply of digital content? They crave the most limiting thing, real human contact, real world experiences.

We have an investment in a company called Bump, based in Paris – from the original founders of Zenly, which was acquired by Snap… They built an interface that allows people to interact in the physical world, stimulated by digital information. We also have Fever, based in London and Madrid, which is essentially the “Live Nation of Europe.” They started with smaller, quirky events — candlelight concerts, the Bridgerton Experience — and have since gone mainstream.

I think we’re coming back in the other direction from purely online consumption, and AI as enabling technology, knowing where you go, who you spend your time with, where you tend to spend time, can tease out a plethora of related interests that make that real-world experience more useful and more personal. This is very exciting for us.