Competitive strategies in AI: Insights from an M12 managing partner

As a Managing Partner at Microsoft’s Venture Fund, M12, it’s been my privilege to dig deep into the exciting AI innovations taking place around the world as we look for ways to create meaningful partnerships and empower our companies to win. In 2023, our team screened and talked to more than 600 of the new companies working in developer tools and customer-facing applications, and over that year we learned so much about what it takes for a promising startup with generative AI at the core of their tech strategy to break out.

We’ve also learned just how hard it can be for great companies to get noticed. The competitive field is widening as companies race to capitalize on the initial disruption this new era of AI has brought. Investors and prospective customers have seemingly endless choices. At M12, we’ve seen four themes emerge as the winning principles of companies that succeed in getting noticed, building resilience, and achieving success: data, dividends, distribution, and delight.

I originally introduced these “four Ds” in an M12 blog post in June 2023, and they continue to hold up. That post was written specifically for a startup audience—but read on and you’ll see that the principles apply to any organization looking to make the most of this golden age of AI.

Data: The most relevant, unique, and accurate data is what gives you the edge

For generative AI, data quality and breadth are still crucial for training capable models, but output can excel based on subjective merits that go beyond a spec-like “ground truth” as in object identification. Establishing and maintaining your customers’ trust is what unlocks access to unique, relevant, and accurate data—essentially, the data your competitors can’t access—and gives you the opportunity to build a moat around it. Gaining enough trust and confidence to establish exclusive access to proprietary datasets will allow you to fine-tune your solutions in a way that no one else can.

Typeface, one of our generative AI partner companies, created a platform that ingests brand collateral, official press releases, and audience performance metadata from customers’ data platforms to instantly create new variations of social media posts, product listings, or whole advertising campaigns. Because this content is grounded in both ingested and approved data, it is customized as brand owners would have intended and provides a high-quality service that saves customers time and money.

Dividends: Deliver a clear, instant, and positive ROI

Organizations should assume that their competitors are embracing the latest models or developer tooling the same way they are—so achieving a faster, stronger, clearer return on investment (ROI) from generative AI outputs is the thing that will keep your customers attached and increasing usage on your platform.

The plausible benefits of incorporating generative AI into productivity software extend to so many tasks and industries that it’s really become impossible to keep track of them. However, when considering the companies that have grown their revenue the fastest—which is by far the most important metric that investors consider—the one thing they have in common is the ability to make the generative AI output the work product itself. In other words: when the AI output is the thing that makes money and saves time, the company experiences immediate benefits, financial and otherwise. This incentivizes more use of AI, creating a virtuous cycle that continually increases capital velocity, leading to potentially exponential gains. We have seen this happen in code generation, marketing content automation, and enterprise workflows with structured documents like contracts, and more examples are appearing every day.

Take a look at how Evisort, another M12 portfolio company, brought Keller Williams an AI-powered contract management solution that achieved immediate results for their bottom and top lines. The AI agent specializes in one task, and does that task faster, more efficiently, and with predicable results: this laser focus on a single core business lever led to quick and positive ROI for the world’s largest realty company.

Distribution: Establish stable channels early

There are now more than 10,000 startups in the AI market competing to be seen and heard, and it takes more than just having a strong product vision and leveraging the technology stack to achieve a competitive advantage. Early movers in the market were able to capture paying customers with minimal customer acquisition costs (CAC), but we’re now past that stage—so success hinges on serving the user base through more than just cost advantages. Startups need strong and stable distribution channels to cut through the noise and ensure they can reach customers in the first place.

Corporate venture firms like M12 do more than just invest: they provide tools, services, expertise, and established, trusted distribution channels. It’s the ultimate resource for startups and offers them a tremendous head start.

All the companies in the M12 portfolio work with us in unique ways to take advantage of everything we have to offer. For example, Web3 startup Space and Time joined M12 in 2022 and Stephen Hilton, their Head of Solutions, sees Microsoft as a “world-class partner, providing Space and Time with enhanced development support and go-to-market acceleration.” Investments and collaborations like this go a long way toward helping startups cut through the noise of a crowded market and establish stable distribution channels early.

Delight: Create stickiness with captivating user experiences

Stop me if you’ve heard this one before: creating consistently delightful user experiences is key to creating the love that keeps them coming back for more. It’s common knowledge, but solution designs can still end up being misaligned with a user’s needs if they are driven by the wrong objectives (for example, marketing).

There are countless opportunities for generative AI solutions to make new inroads with customers by helping them get to information they really want, faster than ever—and the solutions that will stick will use natural language interfaces for greater cognitive accessibility, ease, and friendliness to bring joy to the experience.

Inworld combines all the features of interactivity into a powerful character engine that allows for incredible depth and policy control for operators of applications, games, and other experiences to imbue their user experiences with as close to a human touch as we’ve seen. With a team comprised of veterans from API.AI, Google, and DeepMind, they’re captivating and delighting their customers and are definitely one of the startups to watch in this area.

Our portfolio companies are continuing to win—and we hope to see your company win, too

Since I wrote my original post over six months ago, Typeface has enjoyed continued success and recently announced its multimodal AI content hub for the enterprise. InWorld now has the leading platform for “intelligent” AI non-player characters (NPCs) for games and other entertainment; the XBox platform partnered with them to develop a standard set of tools and capabilities for conversational AI.

Whatever you’re working on today, whether you’re creating new AI-powered solutions or considering how AI will transform your business, I hope you’ll find the “four Ds” to be helpful. If you want to dig deeper into these principles as they pertain to startups, you can read my original post on the M12 blog. And if you’re interested in learning more about how Microsoft can help you innovate with AI, check out Microsoft AI for the latest news and information.  

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Michael Stewart is a Managing Partner at M12. Read Michael’s bio and learn more about M12.