The Weekly (2/23)

Who would’ve thought that Anguilla would be one of the immediate beneficiaries of the artificial intelligence boom.

Yes, you read that correctly.

The British island in the Caribbean with fewer than 20,000 inhabitants doesn’t seem like the place that would benefit from the AI wave sweeping the tech world, let alone already profiting off it.

Except Anguilla’s country code top-level domain is .ai, an irresistible address for AI startups.

The rewards from selling these web addresses have been considerable. Rest of World estimates the revenue generated by Anguilla’s .ai domain — around $3 million per month — currently accounts for around a third of the government’s monthly budget.

Anguilla isn’t alone. Business has never been better for America’s biggest technology companies.

Nvidia, the chip giant, reported a monstrous quarter on Wednesday, posting revenues of $22.1 billion for its fiscal fourth quarter, a rise of 265% year-on-year. The results added $277 billion to the company’s market cap, the largest single day advance in history.

After slumping in 2022, the combined market value of Alphabet, Amazon, Apple, Meta and Microsoft has surged by 70%, to over $10 trillion, since the start of 2023.

Between Anguilla and the market’s recent run, it might be easy to conclude that the market may be overheated and that the AI boom has once again created a period of surplus a la 2021.

That surplus, however, isn’t being seen across other corners of the economy, especially the startup ecosystem. It would be, in some ways, a mistake to think the startup scene is returning to its former exuberance.

According to Pitchbook, there was a dramatic decrease in venture capital investing last year: venture-capital firms invested only $170 billion in 2023, down by half from 2021. The days of lofty valuations are also a thing of the past. 344 unicorns, or startups valued over $1 billion, were minted in 2021. Last year’s figure was 45.

Several factors have soured appetite for startup investing.

Most obviously, the end of the era of cheap money is largely to blame. A higher interest rate environment has reduced the appetite for risk and as such, capital chasing higher returns has declined.

The traditional paths to liquidity have also fallen flat.

The IPO environment remains in a gridlock, corporate buyers have been blocked by the FTC and antitrust watch dogs, and secondary markets require steep discounts.

But it’s not all doom and gloom.

The decrease in funding is likely a return back towards the historical trends. It’s easy to believe that the post pandemic exuberance was the aberration, not the norm.

Founders have also rediscovered the concept of frugality and are no longer pursuing ‘growth at all costs’. Teams are smaller, more nimble, and the hiring craze driving salaries higher has seen a dramatic exhale as layoffs from Big Tech have flooded the job market with qualified workers.

Even further, those companies applying for Anguilla’s domain names are creating tools that should allow startups to become more productive, reduce burn rates, and eventually bring products to market faster. Those .ai domains could even lower the capital required to succeed over the long-run.

The age of the unicorns may be slowing but it doesn’t mean it won’t come back - private markets are often a lagging indicator in the business cycle so it makes sense that startups are now feeling some of the downstream impacts their public peers faced in 2022.

Not all areas of the economy are created equal. Some are experiencing dramatic growth while others are still finding their way. What we're confident in is that regardless of size, a new age of company is being built - one that is efficient, confident, and battle tested for success.

Have a great weekend,

– Your Titan team

Disclosures:

As of writing, NVDA, AAPL, AMZN, GOOG, META, and MSFT are holdings in Titan's Flagship strategy.

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