Telstra Ventures reveals how to make money from AI start-ups and beat the tech giants

Telstra’s venture capital arm is investing heavily in AI with an expectation its portfolio companies will generate $US1bn.

Telstra Ventures managing director Mark Sherman says ‘there’s a mess out there in terms of tons of AI companies’ in a market dominated by Open AI’s ChatGPT.

Telstra’s venture capital arm says it is on track to double the revenue its portfolio companies generate to $US1bn ($1.54bn) – and quadruple soon after – as it places its bets on artificial intelligence, despite the technology being highly expensive to operate.

Big tech companies are injecting billions of dollars into AI, and many are wrestling with how to turn that investment into profits.

But Telstra Ventures managing director Mark Sherman says making money from the hype can be done.

Mr Sherman said there was still room for venture capital in AI, despite Microsoft, Amazon and Google dominating the emerging technology, which is expensive to train and needs costly cloud storage and computer processing firepower to operate.

But Mr Sherman said start-ups and smaller players could generate profits from AI if they focused on a specific problem, rather than a blanket solution like the tech giants are promising.

“There’s a mess out there in terms of tons of AI companies. How do you judge them? I think ultimately it comes down to people, who are obviously super important,” Mr Sherman said.

“And then basically really understanding why there’s a coherence to why AI really helps to solve this problem well.

“A lot of it is just having an authentic understanding of the business problems, the customers. The other bit is it helps to have deep datasets around those problems, so that you can take insights … and solve some of those problems.”

The more laser-focused the problem, the cheaper the AI solution and swifter the pathway to profits.

“If you’re building massive models that are very general purpose, it’s very capital intensive. It costs billions of dollars to train those models,” Mr Sherman said.

“If you have much smaller models that are much more fit for purpose around a specific data type, they’re a lot less costly in terms of having to build them. So we’ve generally been focused on very specific ‘picks and shovels’ types of technologies as opposed to more broadbased models, which is really going to be the home of the Googles of the world, the Amazons of the world and the Microsofts of the world.”

Telstra Ventures managing director Mark Sherman.

Amazon, Google and Microsoft have spent the past 12 months in a frenzy of deal making, spending billions of dollars in AI start-ups as the jostle for pole position in what has been described as not only the biggest shake-up in the tech industry in years, but also in how people work, live and play.

Generative AI has myriad uses – from writing code and generating photorealistic images to sorting work emails and composing business memos – by simply making verbal prompts in basic English. When ChatGPT was launched last year, it attracted 100 million active users within two months, underscoring the rapid adoption of AI across the broader economy.

But it has come at a cost. Microsoft lost money on its first generative AI products, according to the Wall Street Journal. Google has launched AI-backed upgrades with higher price tags, while Adobe has a credit-based system aimed at throttling the use of its AI platform and in recognition of its high operating costs.

“These AI (platforms) all do run on GPUs (graphic processing units), they run in the cloud and so they are expensive to run,” said Adobe’s chief technology officer for digital media, Ely Greenfield.

But as the tech giants have gone big, Telstra Ventures has gone more niche, leading a $US25m funding round for Israeli-based Tabnine – which has created the first AI-powered assistant for software developers – with Atlassian and other investors. It has also backed Cranium, a start-up spun out of KPMG that provides software to companies to ensure their AI systems are compliant and secure against hackers.

“It’s estimated that over 1 per cent of the world’s code has been written by Tabnine. And so we think that that’s going to continue to grow and grow and grow,” Mr Sherman said.

Since its inception in 2012, Telstra Ventures’s portfolio companies has generated more than $US550m in revenue. Mr Sherman said that figure would vault to $US1bn soon. “Then once we get to $US1bn, $US2bn is going to come even faster because, ultimately, we’ve had a good track record of just finding great teams and great products,” he said.

“Of our 96 investments, we’ve generated revenue for 44 of them, and that number just keeps growing every quarter. Ultimately, we want the best companies to come to Telstra.

“And then we developed other channels to bring our companies through with some security bars and some other systems integrators that love our types of companies.

“It’s a super long way of saying that the best founders want to work with us because we show up not only with investment dollars, but we can also show up with revenue dollars as well.”