Firm and Portfolio Updates – August 2024

Inner Loop Capital is a pre-seed and seed venture capital fund investing at the frontier of Infrastructure Software and AI. Inner Loop’s thesis is that the $600B Infrastructure Software sector (Cybersecurity, Cloud Tech, and Data Science) is being simultaneously accelerated and disrupted by AI. This collision creates our two-part investment opportunity: AI for Infra and Infra for AI.

• AI for Infra companies are AI-based innovations for the Cybersecurity, Cloud Tech, and Data Science markets
• Infra for AI companies are the new layers of infrastructure that are being built now to support the fifth platform shift in the global technology stack, toward the ubiquitous integration of AI.

Inner Loop is based in Baltimore, and the current portfolio spans from San Francisco to Israel. Inner Loop is currently investing out of a $30m-target Fund II. Inner Loop Capital is a solo-VC firm managed by Justin Label.

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Firm and Community Updates

Welcome to the August updates on Inner Loop Capital and our portfolio. As the kids go back to school, we go back to work by reporting on the significant milestones in the Inner Loop portfolio and community!

Thank you to Baltimore AI entrepreneurs and co-hosts Bill Karpovich and Chris Sleat for launching what we have dubbed “Baltimore AI Dinner #1”. This Baltimore AI Dinner Series for founders, builders, investors and the just-curious grew out conversations with Bill, Chris and me around three core beliefs:

1. There is already compelling work in AI in the Baltimore region, including some globally-excellent and impactful innovations.
2. Founders, Builders, Investors, and the broader community in the region do not naturally do enough to find each other, collaborate, and lift up each others’ stories.
3. As with semiconductors, software, and the Internet before it, in a decade or two, “AI” will not be a sector. It will just be an assumed part of “tech”. Nobody brags that their tech solution uses chips or accesses the Internet. That is just what tech solutions do. So it will be with AI soon enough. However, starting right now, the regions that lead on and harness the power of AI will see their tech sectors grow faster than the market as a whole. Those that do not will be laggards.

We believe that there is enough AI excellence in the Baltimore region to enable the area to accelerate into a next leg of tech-powered economic growth, but that it will only happen if participants strive to be globally competitive with their work, and build the connections that propel a true ecosystem. We hope that the Baltimore AI Dinner Series plays a small role in that growth.

Thank you to all of the attendees of the inaugural dinner, representing some of our major educational institutions, start-ups, investors, and financial institutions active in this AI Platform Shift. If you know someone who would be additive to future dinners and events, please reach out to me with recommendations. (Self-nominations are allowed and encouraged.) A bit of a backlog for future dinners has already formed, so please be patient with us as we work to include everyone who deserves to join. That is the sign of a thriving ecosystem, in my opinion!

Baltimore AI Dinner #1, August 2024

Speaking of AI Excellence in Baltimore, I was so excited to see the launch last week of the TechStars AI Health Baltimore Accelerator, Powered by Johns Hopkins and CareFirst BlueCross BlueShield. A three-year program, this will raise up and/or bring through Baltimore 72 new start-ups focused on the application of AI to Healthcare innovations. This kind of bold action has the potential to transform the healthcare industry and the Baltimore tech ecosystem. Kudos and congratulations to the many close Inner Loop Capital friends who made this happen, including TechStars MD Adam Phillips, Myra Norton of Johns Hopkins, Technology Ventures, Doba Parushev of CareFirst, and many more behind the scenes! While Inner Loop does not focus on healthcare-related applications, I nonetheless hope and believe there will be some overlap between our work and this program, largely at the core infrastructure level of AI. More details on the program can be found in the coverage from TechStars, Technically, and Business Journals.

After a few years off for some scheduling conflicts, I attended Black Hat this past month in Las Vegas. It turns out that 111 degrees, in the shade, for short stints, really isn’t that bad. Black Hat felt like ground zero for one part of the Inner Loop investment thesis this year – AI for Security (a subset of our AI for Infra thesis). Basically no major security innovation is not integrating a significant amount of AI into its product at this point, consistent with a perspective I have been sharing since the first issue of our AI newsletter, Ad Interim. (April 2023: “It is nearly certain that every company we touch going forward will utilize or be affected by these [AI] technologies.”)

Inner Loop’s work is much broader than “AI for Security”, however. First of all, there is “Security for AI”, where the work is much more nascent and where I have generally found the available investable companies to be less compelling, as referenced in the most recent Ad Interim. Moreover, Security is just one subsector of Infrastructure Software, gesturing at the potential size of the disruptions and opportunities yet to come.

I went to Black Hat on relatively short notice this year, and I deeply appreciate the people who took time, effort, and expense to organize amazing gatherings where we could efficiently catch up with old friends and meet potential new collaborators. This includes Seth Spergel and Merlin Ventures (Tamnoon co-investors), Michael Sutton and David Endler of Runtime Ventures (StepSecurity co-investors), and especially exited Inner Loop founder TJ Gonen (now a Tamnoon GTM Advisor!), who organized a top-notch dinner for an amazing set of fellow travelers on 12-hours’ notice. “We did our best!”

I continue to serve on the NVCA’s Artificial Intelligence Working Group. It has been an important conduit of up-to-the-minute information and connections to other investors who care deeply about these issues – for our portfolio companies, for the overall health of the innovation economy, and for the safe adoption of AI throughout society. In my view, the Working Group has provided a balanced perspective on responsible AI legislation, while also pushing back on proposals that may have problematic unintended consequences. Most recently, the NVCA has recommended against support for California’s SB 1047, the Safe and Secure Innovation for Frontier Artificial Intelligence Models Act. I link to the NVCA’s letter here for your information and consideration.

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Portfolio and Industry News

Portfolio News

MLtwist also announced their new partnership with Carahsoft, which will provide greater access to AI data readiness solutions for the public sector.

Ad Interim Addendum – Updates on the AI Platform Shift

Ad Interim Addendum is where we capture the most important news and thinking in AI that caught our eye recently. This list has now become too extensive to collate only quarterly in our Ad Interim newsletters.

Some readers of this letter are building and researching in AI every day. Others have different day jobs and are only occasionally picking up on trends or experiencing the technology first hand. Either way, Ethan Mollick’s recent edition of One Useful Thing, “Change Blindness”, is an absolute must-read.

Whether you are missing the evolution because you are too close to it daily, or you are missing it because AI seems like a lot of hype that hasn’t changed your life yet, I can nearly guarantee that you have not absorbed the pace at which this technology is evolving. Ethan offers several examples you must experience first hand, but here is one visual: The generated image for “nursing leader” 21 months ago, when Ethan launched his substack, vs. today:

This is an order of magnitude change in technology that I never experienced over any 21-month period of the Internet, Cloud, or Mobile Platform Shifts. I doubt anything so substantial ever took place in the growth of semiconductors over one cycle of Moore’s Law. I therefore submit that the current development of transformer-based Generative AI is clocking the fastest technological advancement in human history.

Is this a gimmick? Sure. Is it about to profoundly impact nearly every aspect of business and society? I think you can take to the bank that the answer is yes.

So then where are all the great businesses and trillions of dollars of new GDP? Matthew Linley tackles the hottest question in tech today – is this an AI Bubble? – in a recent Supervised substack. This is a topic I also addressed in last month’s Ad Interim.

To talk about it in a structured way, we have to ask, what defines an investment bubble? Is it that some investments will fail spectacularly and generate some embarrassing episodes? I’d argue that cannot be the definition of a bubble, as such episodes are almost guaranteed to happen during any time of rapid technological change. Perhaps a bubble is when the net investment outcome of the whole system is negative. Surely investors should opt out of that?

Except, perhaps not. The net investment outcomes of all 1999 Internet investments looked negative, perhaps as late as 2004. Amazon was only ~$15 billion market cap then. Ten years later it was ~$150 billion and ten years after that ~$2 trillion, easily justifying by itself all the bad investments of the internet bubble. Now, an investor with perfect hindsight would have skipped the Internet bubble and just bought into Amazon alone as a public company. Except being involved in the “bubble” may have very well prepared future Amazon investors to better understand the eventual scale and power of the model.

Moreover, we cannot know now that even this definition of bubble above applies to AI today. It is entirely possible that the net investment outcomes of today’s frothiness will in fact be positive. I can’t say for certain, but we live in a world of risk and probabilities. I had this debate with a very grounded VC investor recently, and I am prepared to take this position: It is sufficiently likely that we are not currently in a bubble – that the net investment outcomes of today’s AI investments will be strongly positive – that we must “be in it to win it”. Furthermore, I still believe that careful investment selection can increase the probability of beating the overall AI investment market today. And finally, even if the market’s investments fail on average, and even if we cannot sufficiently beat the market to overcome that drag, we are still positioning ourselves to be smarter and better networked into what could prove to be the most important technological development in human history. Who could pass up that opportunity?

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Archives and Please Be In Touch

Archives for both the Firm and Fund Updates (twice per quarter) and Ad Interim: Provisional Thoughts on AI (once per quarter) are available from the Inner Loop Capital website. Please visit innerloopcap.com/news to get caught up.

Now that you are up-to-date on all Inner Loop activities, please reach out any time. I welcome:

• Discussions about any of the companies, technology sectors, or investment themes above
• Introductions to founders or future founders in Digital Infrastructure, including Cybersecurity, Cloud Tech, DevOps, DevTools, Data Science, and AI
• Connections to potential co-investors or collaborators in these sectors
• And drop-ins to Baltimore (or the greater Washington D.C., area) any time

Do not hesitate to reach out if you see something or have ideas on ways we can collaborate more closely.

Justin Label
Managing Director
Inner Loop Capital