The $2.3B AI Startup Graveyard: 3 Patterns You Must Avoid

Hi there -

Here is this week’s “1 principle, 2 strategies, and 3 actionable tactics” for running lean…

1 Universal Principle

“Love the Problem, Not Your Solution.”

We're witnessing a massive extinction event in the startup world. 73% of AI startups funded in 2023 have already pivoted or died. The total capital destroyed: $2.3 billion.But here's the thing – they're not failing because AI doesn't work. They're failing because founders are building solutions in search of problems.After analyzing 100+ failed AI startups, I found the same 3 patterns repeating:

1. The Hammer Problem: Building something impressive that nobody will pay for.
2. The ChatGPT Killzone: Creating a business that OpenAI can destroy with one update
3. The Complexity Trap: Making things harder, not easier, with AI

The survivors aren't the ones with the best AI – they're the ones with the best business models. They understand a fundamental truth: AI is not a differentiator. It's a tool.The winners treat AI like electricity – essential infrastructure, but not the reason customers buy. They focus on solving expensive problems, building defensible moats, and delivering 10x better outcomes.The AI gold rush is over. The AI business-building era has begun.And that's actually good news.

2 Underlying Strategies at Play

I. The 10x Rule for AI Startups

Your AI solution must be 10x better than the alternative, not just different. How you define "better" is the difference between success and failure.

Here's the critical part: You must be 10x better on a dimension customers actually care about.

• Being 10x more sophisticated doesn't matter if customers want simple.
• Being 10x more feature-rich doesn't matter if customers want a focused solution.
• Being 10x more "AI-powered" never matters.

If you can't hit 10x on at least one critical dimension, you don't have a business – you have a feature.

II. The Defensibility Test

Every AI startup must answer: "What happens when OpenAI, Google, Anthropic, or Microsoft copies us?"Here are four examples of acceptable answers:

1. We have proprietary data they can't access":Example: Industry-specific transaction data from exclusive partnerships
2. We have domain expertise they can't replicate":Example: 20 years of construction industry knowledge encoded in the product  
3. "We have network effects they can't overcome":Example: Each customer's data improves the product for all customers  
4. "We have regulatory approval they don't have":Example: FDA approval for medical devices, financial services licenses

Things like your algorithm, your UI, your prompts, and your fine-tuning are temporary at best.

3 Actionable Tactics

I. Take stock of existing alternatives

List your top 3 competitors (including manual processes and doing nothing) by taking stock of the status quo solutions, not shiny new AI startups. Some of the most successful companies solve boring problems no one chases.

II. Then, apply the better test

1. What metric matters most to customers?
2. Are you 10x better on that specific metric?
3. Can you prove it with numbers, not promises?

If you can't hit 10x on at least one critical dimension, you don't have a business – you have a feature.

III. Build Defensibility From Day One

Write your moat in one sentence. Rules:

• Can't include the words "our algorithm" or "our AI"
• Must be something that gets stronger over time
• Must be something a competitor can't buy or build in 6 months

Then run the "Day 100 Test": If a well-funded competitor started copying you today, what would stop them from catching up in 100 days?If the answer is "nothing," you need a new strategy.

To be clear, I am not dismissing AI as irrelevant. But quite the opposite. Like electricity, I think AI has the potential to transform how we work, live, and (fill_in_the_blanks)...

I have been dedicating almost all my free time to exploring ways to accelerate our vision of democratizing entrepreneurship. See P.S. below.

That’s all for today.

See you next week.

Ash

Author of ​Running Lean​ and creator of ​Lean Canvas​

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P.S. If you're already following Continuous Innovation principles, like Demo-Sell-Build, you're already moving 10x faster than before. But what if you could move even faster? That's the promise of LEANSpark. ​Join the waitlist here ->

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P.P.S. Check out this week’s video: ​