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A robot walks on-stage during the annual Nvidia GTC Artificial Intelligence Conference at SAP Center in San Jose, Calif. on March 18. Amid high interest rates, venture capitalists have a smaller pool of cash to hand out to startups, making it more difficult for companies to raise funding.JOSH EDELSON/Getty Images

Allen Lau is the co-founder of Wattpad and co-founder and operating partner at Two Small Fish Ventures, which invests in early-stage technology companies.

Bright spots in the current venture-capital landscape exist. You just need to know where to look.

Recent reports are right. Amid high interest rates, venture capitalists have a shrinking pool of cash to dole out to hopeful startups, making it more challenging for those companies to raise funding. In the United States, for example, startup investors handed out US$170.6-billion in 2023, a decrease of nearly 30 per cent from the year before.

But the headline numbers don’t tell the whole story.

There’s a night-and-day difference between the experience of raising funds for game-changing, deep-technology startups that specialize in artificial intelligence and related fields such as semi-conductors, and those who try to innovate with what’s referred to as shallow tech.

Remember the late 2000s? Apple’s App Store wasn’t groundbreaking in terms of technical innovation, but it nonetheless deserves praise because it revolutionized the smartphone. Then, the App Store’s charts were dominated by simplistic applications from infamous fart apps to iBeer, the app that let you pretend you were drinking from your iPhone.

That’s the difference – those building game-changing tools and those whose products are simply trying to ride the wave.

Tons of startups are pitching themselves as AI or deep-tech companies, but few actually are. This is why many are having trouble raising funds in the current climate.

It’s also why the era of shallow tech is over, and why deep-tech innovations will reshape our world from here on out.

Toronto-based Ideogram, a deep-tech startup, was the first in the industry to integrate text and typography into AI-generated images. (Disclosure: This is a company that is part of my Two Small Fish Ventures portfolio. But I’m not mentioning it just because I have a stake in it. The company’s track record speaks for itself.)

Barely one year old, the startup has fostered a community of more than seven million creators who have generated more than 600 million images. It went on to close a substantial US$80-million Series A funding round.

As a comparison, Wattpad, the company I founded, which later sold for US$660-million, had raised roughly US$120-million in total. Wattpad’s Series A in 2011, five years since inception, was US$3.5-million.

The “platform shifts” over recent decades have largely played out in the same way. From the personal-computer revolution in the late 20th century to the widespread adoption of the internet and cloud computing in the 2000s, and then the mobile era in the 2010s, there’s a clear pattern.

Each shift unleashed a wave of innovation to create new opportunities and fundamentally reshape user behaviour, democratize access and unlock tremendous value. These shifts benefited the billions of internet users and related businesses, but they also paved the way for “shallow tech.”

The late 2000s marked the beginning of a trend where ease of creation and user experience overshadowed the depth of innovation.

When Instagram launched, it was a straightforward photo-sharing app with just a few attractive filters. Over time, driven by the massive amounts of data it collected, it evolved into one of the leading social-media platforms.

This time is different. The AI platform shift makes it harder for simplistic, shallow-tech startups to succeed. Gone are the days of building a minimally viable product, accumulating vast data and then establishing a defensible market position.

We’re entering the golden age of deep-tech innovation, and in order to be successful, startups have to embrace the latest platform shift – AI. And this doesn’t happen by tacking on “AI” to a startup’s name the way many companies did with the “mobile-first” rebrand of the 2010s.

In this new era, technological depth is not just a competitive advantage, but also a fundamental pillar for building successful companies that have the potential to redefine our world.

For example, OpenAI and Canada’s very own Cohere are truly game-changing AI companies that have far more technical depth than startups from the previous generation. They’ve received massive funding partly because the development of these kinds of products is very capital-intensive but also because their game-changing approach will revolutionize how we live, work and play.

Companies like these are the bright spots in an otherwise gloomy venture-capital landscape.

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