Pop quiz: How do you know if you’re witnessing a real wave of technology transformation, and not just a tech flash in the pan?
Answer: Look at the stack. In a true technology wave, the whole stack changes, not just one layer, says Kindred Ventures’ Steve Jang. And if you look at AI, he says, that’s exactly what’s going on: “Right now you’re seeing it all the way from chips all the way up through the application layer.”
Jang, Kindred’s founder and managing partner, was speaking at Fortune’s Brainstorm AI conference in San Francisco on Monday, on a panel to discuss how VCs are thinking about these bubbly times in the AI market. His point is that the angst over the AI bubble is kind of besides the point. What really matters is whether the underlying tech transformation is real or not.
Sapphire Ventures partner Cathy Gao, who was also on the panel, said that valuations for some companies have clearly climbed far beyond any sort of fundamentals. But she also noted that the growth curves of certain companies right now “far outstrip the growth curves of companies we’ve ever seen before.”
To help sift through the hype in this environment and find the startups with real staying power, Gao said she uses a three-question test.
First, is the startup’s product a “feature” or a “workflow?” The stand-outs, she says, are “companies that are able to actually embed and fully overtake an existing workflow, while building significant switching costs.”
Second, is distribution built-in? People don’t want to learn how to use another tool, says Gao. The key qualities here are whether the tool is “integrated in usability and in all the other solutions that it needs to be in order for the workflow to be fully functional?”
And finally, does the company get stronger over time? This is called “compounding durability,” says Gao. “With every new user, does the solution get better, does it get cheaper, does it get faster?”
We’ll have more questions, and answers, at Brainstorm AI today. Watch the livestream here.
See you tomorrow,
Alexei Oreskovic X: @lexnfx Email: alexei.oreskovic@fortune.com Submit a deal for the Term Sheet newsletter here.
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