Cindy Padnos, Illuminate Ventures and Itamar Novick Recursive Ventures: B2B AI Investing

Cindy Padnos, Illuminate Ventures

Cindy Padnos, Founder/Managing Partner Illuminate Ventures, a Seed-stage VC platform investing in “further-along” B2B software companies throughout North America. Across her 15-year investing career, Cindy has led or co-led Seed stage investments in nearly three dozen companies, many of which have gained strategic exits – including 2 successful IPOs (Xactly: XTLY and Coupang: CPNG) and acquisitions by industry leaders including Cloudera, AutoDesk, and New Relic, among others. Cindy is a prior successful serial entrepreneur in the B2B space including as founder/CEO of early SaaS startup Vivant, and a longstanding, passionate, advocate for diversity in the Tech ecosystem. Cindy has been selected by Fast Company, the New York Times, and the San Francisco Business Times for recognition among their “most influential women” cohorts on several occasions.

Itamar Novick Founder Recursive Ventures is a solo capitalist. Recursive Ventures is a pre-seed fund focused on AI and emerging tech startups. He has supported over 50 successful startups, including Deel, Honeybook, Placer, Credible (IPO), MileIQ (acquired by Microsoft), Automatic Labs (acquired by SiriusXM), Tile (acquired by Life360), SafeGraph, and Armory. He’s been recognized by Business Insider as a Top 100 global seed investor (#17 in 2021, #29 in 2022). As an operator, he helped take Life360 from Seed to IPO, scaling the business to over $250m in revenue.

AI Funding

Cindy: Illuminate Ventures invest at seed stage, and we try to look for companies that are representing business trends and customer needs. AI is an enabler, and it is enabling companies to do things they never dreamed that they could do before. So the excitement that we see around AI as an investor is that it’s opening up new markets. It’s delivering opportunity at scale much more rapidly than in the past. And it you know despite the fact that LLMs and other aspects of it can be costly, other elements of it actually reduce the cost of being able to enable some very interesting capabilities across the B2B landscape.

Itamar: We’re also focused on Enterprise B2B opportunities. And we’re very excited about what we see in the market. We think this is a start of a mega cycle. probably as big, if not bigger, as the invention of the of the personal computer. We’re getting down to building the applications as the stack matures in what we believe could be a multi-trillion dollar cycle and would actually potentially disrupt a lot of the SaaS companies, both incumbents and newcomers that we’ve seen rise over the last 10, 20 years. It’s probably more of an opportunity for executives and corporates who are smart enough to jump on this trend early on and actually it lends them the opportunity to operate significantly more efficiently than what they’ve been able to do in the past.

Itamar: Recursive Ventures has been focused for a while on Data and AI companies. The way we really think about the world is that the quality of your AI models and obviously the quality of the service that those models can deliver is as good as the quality of the underlying data and how much data coverage you have against the user cases and workflows which you are trying to build. So really the way we think about the world in terms of what it takes to win in AI is that we are looking for all sorts of data moats. And those moats being extremely effective at leveraging your customers’ data on their behalf and doing exclusive partnerships and data consortiums that enable you to access data that other people might not have or do not have the rights to access.

AI Education

Cindy: I think there’s some really smart things that are being done inside these large corporations to try to not just build technology and do R&D, but to build relationships with their customer base in a way that they will be looked to, as the knowledge base of how does a CEO learn about AI. Microsoft has taken the Fortune 100 CEOs off-site twice over the last year for multi-day events, bringing in the top people in the world to help educate them about the importance, the value, the opportunity represented by AI and the risk if you don’t adopt.

Funding Trends

Itamar: We’re still riding a generalized trend where both deal value and deal count are significantly down, compared to the high prices of 2020, 2021, 2022. AI at pre-seed, and seed stage companies are sort of the exception to that rule. So even though if you look at the high level numbers, it’s down across the board for funding to startups at the earliest stage and later stages as well with the one exception of AI. And obviously, at least in our case, the majority of the deals that we see now are AI deals. We’re potentially entering another bubble, but we’re definitely seeing pretty steep pricing out there. It’s not coming down as quickly as we wanted. And there is significant competition on the ground for these seed stage AI investment opportunities.

Picking Winners

Cindy: I would say that the opportunity for disruption is truly there. And I’m seeing founders recognizing that opportunity and even disrupting themselves. We’re in conversation right now with a company that had built product for 20 years to support their IT service business with underlying data sets. They had a very profitable business. And as Chat GPT, and other technologies became much more viable over the last two years, they stepped back after 20 years in business and said, if we don’t completely disrupt ourselves, start leveraging AI and our highly proprietary extensive data sets, or we’re going to see ourselves just wiped out. We have to replace ourselves. And they literally have done that over the last 18 months. It’s exciting when founders see that opportunity!

When you’re looking at these companies, the future is really important. And the expectation that a company won’t hit any bumps in the road; will be able to raise, let’s say a Series A at an easy uplift and valuation. More experienced entrepreneurs I’m finding aren’t out there seeking the best valuation. They’re seeking a fair valuation and they’re really planning for what they have to deliver in the future to make the next round. So I would say, that that there’s a really interesting balancing act going on. I’m seeing so many experienced entrepreneurs coming back into the market, people who didn’t have to, people who’ve already had successes that could put them in a position to be investors themselves. They’re stepping back and saying, this is such an exciting wave, I can’t stand on the sidelines.

Itamar: We’re looking at companies that are doing expert labeling and customer led labeling in very effective ways, so they can create the type of labeled data set that they need in order to accelerate training or fine tuning. We’re looking at companies doing cutting edge things with integrating knowledge graphs and all sorts of unique data mapping and that make agents more effective in doing vertical tasks across the enterprise. And we’re looking at what I think is the next generation of open source, which is really communities of data scientists.