Beyond the AI Bubble: What Founders Need to Know Now

Welcome to Startup Success, the podcast for startup founders and investors. Here you'll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world. Stories that will help you in your own journey. Startup Success starts now. Welcome to Startup Success. In this episode I sit down with Jonathan Aberman, co founder and CEO of Hubside and and longtime investor and advisor to early stage startups. We explore what makes a startup truly stand out to investors, the common mistakes founders make early on, and how the rise of AI is reshaping what it means to build a differentiated company. Jonathan also introduces the concept of original intelligence and shares how founders can use it as a competitive advantage and in an increasingly AI driven world. Well, welcome Jonathan. Thanks for being here. Absolutely. I'm glad to be here. Thank you for having me. I'm looking forward to this. So why don't you walk us through your background a little bit. You've worked with so many different companies and, you know, been in all the different areas of the ecosystem. I think that would be interesting for listeners. Well, I certainly have a 360 degree view of being involved in startups. You do? Yeah. I'm a founder now of an AI company. In my past life I've been a venture capital lawyer, I've spent time as an investment banker, I've been a dean of a business school. I've helped to do policymaking at the federal and state level around innovation. So yeah, I must say over the last 30 years I've looked at innovation and entrepreneurship from just about every direction I think a human being can. And yeah, I certainly have a pretty informed perspective and yet I keep doing it. So what does that tell you? That tells you something. And I want to get into your AI startup a little later in the show because it's super interesting. But let's start with the basics. We have a lot of first time founders listening and you know, they just some advice on how to approach, you know, investors, how to talk about their story. What investors are looking for I think would be helpful. Wow, there's a lot in that. We could spend the next hour. So let's start with the most important thing, which is that I think that the mistake a lot of entrepreneurs make is they confuse fundraising as a validation event rather than what it really is, which is just a step along the way. I see this particularly when I look at how people treat venture capital. The reality is that the significant majority, well north of 95, 99% of startups, never raise a dollar of outside Capital other than their friends and family or their own bootstrapping. Wow. Well, it's true. I mean, if you look at the Inc 5000 list, for example, you'll see that a lot of companies on that list never raise a dollar of outside capital. I think when I used to teach entrepreneurship, the statistic that I used to use was the average amount of money raised in the Inc 5000 companies was roughly $50,000. So we have this tendency when we think about innovation to get really excited about what I'll call the single combat warrior view of entrepreneurship, which is, you know, the hero, the person who raises $100 million, $200 million, billions of dollars and has that spectacular exit. And that has the result of basically, I would say, in some ways perverting and changing the output of how most of us look at it. So, number one, venture capital is a very narrow financing tool that's only suitable for a really small subset of startups. So if you start out thinking, I'm going to raise venture capital, you already are putting yourself in a pathway where most of the time you're not going to succeed. Nobody talks about that. Because if you're in the venture industry, as I have been, you want people to come to you and you want everybody to think you're useful. So the whole industry, TechCrunch and all the blogs are all designed to encourage you to think venture capital is the best way to go. So put that aside. What do venture capitalists look for? Well, frankly, venture capitalists look for the same thing you should be looking for, which is, do I have a sustainable business that's growing? And again, entrepreneurs who tend to think about the standpoint, oh, I have to raise venture capital will say, well, what do I have to have in the way of revenue to get a series seed? What do I have to have in the way of revenue to get a series A? And they don't understand that really the revenue number isn't meaningful. What's meaningful is what do you have more people who want to buy your stuff than you currently have the ability to deliver? Is there unaddressable demand? Is there a demand that can't be funded with coming in the cash flow on your balance sheet? And if the answer to that is yes, then you're a growing company and then it's just a question of how fast. If you're going really, really fast and you have the potential to dominate a market that's going really fast, then you're suitable for vc. So I think that there's just too much Focus frankly on, oh, I need to raise money to have a business and instead it should be I need to have a business and how do I raise money to support that business? That is a great approach. I appreciate the fresh perspective on this show because so many of the people on this show that come on are all about, you're right, getting the VC investment and that's like the validation, right? What kind of round did you raise? And in this market where it's so tough, where so many dollars are just going to a few companies, what are some other ways then that entrepreneurs can do it besides VC funding? Well, I think the first thing that I would encourage everybody to do when you're thinking about starting a business is understand why the money is pooling in the economy and whether or not you have a way to play in that. You know, there are a lot of people right now who have raised a lot of money and are running to try to do, quote, AI companies. AI companies. And the issue with a lot of AI companies is that fundamentally they're at best a service layer over the large language models. At best, yes. There's nothing proprietary about them other than they're a service layer. And the biggest problem, the reason why you're seeing this pooling of capital is this is the first time we've seen technology companies that are leading the trend actually trying to vertically integrate. If you look at the Internet bubble, social media bubble, these companies were quite happy to dominate a particular part of the ecosystem, social media, advertising. But if you look at what OpenAI like as recently as what they did over the last week or two in Anthropic, where they're now partnering with banks and private equity firms to push engineers to the edge. The way they're increasing capability, they're really competing with most of the AI startups have informed the last couple of years to take their business opportunity away from them as fast as they can. So the first thing to say is if you don't have a way to create something within the AI environment that OpenAI or anthropic or Google or Meta can't take away from you by getting some engineers, don't, you know, don't, don't, just don't. Because this is now a game that's being played at the level of billions and billions of dollars, it's winner take all to become the dominant monopolies in the AI trend. So let's just start there. Doesn't mean you shouldn't do AI business, but if you want to do venture backed business, the money Understands that if you are trying to differentiate against these big guys, you better be very, very proprietary and special. So, you know, so that's number one. Number two, because a lot of the money is getting sucked into AI, it raises the question of what do you do as a startup? Right. Yeah. The answer is that a businesses and markets always cycle. We're in the middle of a bubble, like the Internet bubble, like the social media bubble. It's a bubble, but bubbles take time to work their way through. And it's a financial bubble because not everybody that's investing is going to win, but the long term trend is going to remain. So if you're starting a business and you don't want to be an AI business, understand that the world you're going to operate in is going to be heavily reliant on AI. It would be like starting a business in 2005 or 2003 and not having a plan to be a strong business that uses the Internet and social media. You follow me? Good point. Yep. So if you don't, if you're not, if you don't have a plan for that, if you don't have a plan for how to compete in the AI economy, your business is not going to go big, in which case it's not going to be a business for investors, it's going to be business. Maybe for you to do so, for example, you could be a really, really great teacher of how people could use AI. Well, that's a skill a lot of us need. That's a great consulting business. It could be a great business. It's not a venture business. No. Right now. So then you got the issue of, well, if I'm in life science or, you know, if I'm in plain old software SaaS, I think that the answer is that markets are imperfect. But I've never in my life, literally, I've never in my life seen a business that didn't have compelling growth characteristics, not fine capital. So it come to me, it comes back to, to be blunt, if you don't have people buying your product, you'd have people buying your service. It's not a business that's suitable for you to do much less get money from outsiders. And that's hard truth. A lot of people want to hear that because it's like, you know, but, you know, this is one of the advantages of seeing it from 360. Yes. I've seen some really, really, really good friends of mine waste, you know, 1, 2, 3, 4, 5, 6 years or more of their lives pushing this you know, this up uphill and it's their right as entrepreneurs to do that. But we should understand that at some point markets speak. Yeah, yeah, you are speaking the hard truth. I like it though. It's great. I'll tell you a funny story. Well, when I used to teach, one of the things that I point out when I teach about corporate finance and entrepreneurship is that the reason why VC money is so expensive is because they have to get compensated for all the risk they're taking. And I'll draw a map through the capital markets line. I'll say down here is government debt, private equity, VCs, up here, way up here, very risky. And I'll say the only thing that's more risky than that is the mafia lending you money. Oh, gosh. Right. It's like, what do you mean? I said, well, think about it. You know, if you're borrowing from the Mafia, you clearly you're a risk. Right. And, and so, so inevitably a student will say to me, well, you suggested the VCs are like the mob. And I'll say, now you understand. Now you get to the point. No, I don't mean to go mob. I'm a vc. I make, I'm. Look, I've been in the veterans for 25 years. But understand the money's really expensive for a reason. Right. It comes with a lot of costs, I think. Yeah. So, I mean, we'll talk. I will now talk, if you want, about some of the ways you can raise money. But I thought it was really helpful for your listeners just to have some loving, honest observations about if you're not raising money, it doesn't make you bad and why it's hard to raise money? No, I think that was really helpful. Yeah. I mean, any other the ways you can share besides VC money? Money, I think would be helpful. Well, I think that at the end of the day, raising money from people that know us is the place to begin because they're the ones that are going to be able to look at it from the standpoint of not a financial investment necessarily, but from one, an investment based upon some level of trust and then some level of willingness to share the entrepreneur's view of risk. So frankly, the reason why friends and family and angels can be better financially for you is because they invest their own money. And so the psychological connection they can have with you, the trust they can give you, will make a difference. It's not surprising that most people raise money from people they know or angels that they've met because it's their Money so they can take a chance. Many states have financial incentives. They have venture funds where they invest in the promising companies to do economic development. Most states do these days. Again, they're not really risk based investors. They're more interested in growing companies to put people to work. So if you're in a state like Virginia or Maryland or Pennsylvania and many others, they're state venture capital and business assistance organizations that provide 50, $100,000 to start businesses if they look promising. The federal government has a program called the Small Business Innovative Research Program, which you may have heard about, sbir, you know, that pumps a couple billion dollars a year into startups to develop technology that could be of interest to the federal government and, and that has other advantages as well. So for me, the way the tiering works is you always start a business on your own back. You know, if you're not willing to take the risk, if you're not willing to take some financial risk, and I don't mean mortgage in your house, I mean just like working nights and weekends or going without salary. But unless you're willing to take the risk, nobody else should take the risk. Fair wealth side. Yep. You know, just, it's a fact. But once you sort of signaled that, then if you need additional money and you've sort of maxed out your charge cards and done the obvious things, then it's friends, it's family, it's state and local economic development, it's federal funding. Those are the general ways that people sort of bootstrap to their first customers or customers. Right. And then it's a question of whether you're going to finance through customers. We would like actually grow your business by selling stuff or whether you get to the point where it looks like it can scale rapidly enough that you can go to strangers who won't invest in you because they like you, but will invest in you because you can help them make money, I. E. Angels, you don't know, professional investors. Or you might get to a point where you have enough predictable cash you can borrow from a bank. You know, I mean, a lot of people grow businesses, family businesses, and make a lot of money and support the families really well by doing sba guaranteed bank loans. Yes, you know, it's true. So, so to me, the way it looks is every business I've ever seen starts the same way. The founder sees a problem they want to solve, or group of founders see a problem they want to solve, they then get enough money or, or sweat equity together to get to a prototype or get to initial Service offering, right. Get in the market. How do people react? If you need some money to start to do the other things you need to do, then you're credible. You borrow money from your uncle, you know, maybe somebody at school, maybe you go on angel list, I don't know. But you know, you raise some money. Oh, the other thing I forgot because I'm so old school is don't forget crowdfunding. Particularly, particularly when you're crowdfunding a product. You know, I really, really think that going and using the crowdsourcing not for equity, I don't like that as much because then you're dealing with individual investors that aren't very wealthy and that can really mess up your long term capital structure. But getting people to prepay your product, you know, what better product market discovery is it than that getting a thousand, two thousand or five thousand people who say, you know what, if you deliver that, I'll buy it and they actually give you the money ahead of time. So you basically finance the construction of their product with their order. That's a phenomenal way to start a product company. I completely forgot about that. That's a good call out. They also can give you good feedback. Right. On tweaks to your product and whatnot. Yeah, yeah, yeah, absolutely. Now just to go complete the cycle, what do people look for? Not what do, what do investors look for, what do people look for? It's a little known fact, I think that most people actually, before they get greedy, actually have to get over their fear of being embarrassed. And nobody will give you money unless they're convinced you're not a criminal. Nobody give you money unless they're convinced you're trustworthy. And so you have to get over the fear of embarrassment and the fear of being lied to before people can get greedy. And I don't think entrepreneurs really understand that. So they go into a meeting and they're all flashy and all excited, you can't lose. And they come across really sleazy and slick and then there's no trust that's developed and they understand the media went great. Why did nothing happen? The answer is because you over indexed on slick and you're under indexed on connection. The best way to describe it is psychologists have pointed out, and most venture investors know this, that anybody who's an entrepreneur is in some ways crazy. But we are, I mean we are, think about it, we wake up and we're like, ah, I got an idea, going to do X. It's not like everybody's sitting around saying, oh, Jonathan, Please, I hope you start a company. I. My life was empty before. Everybody's getting along just fine. Yes, but yet, but you, you wake up and say, I'm going to do something that's going to make people change your behavior, that is in some ways shaking your fist to status quo. We would define that some ways as, as crazy. Not crazy in a, an insane way, but crazy like, how dare you be that. Right. But the difference is some, everybody's got to be crazy enough to be an entrepreneur. But some people are truly pathologically mentally unstable. They're narcissistic, they're sociopathic, they're manic. And unfortunately, or fortunately, entrepreneurship draws people with those type of pathologies to them. That is so true. Right. So believe it or not, when I, when I'm an investor, the number one thing I want to get a handle on quickly is whether I deal with somebody who's crazy enough to be an entrepreneur or somebody that doesn't have mental stability. And so what I look for is I look for self awareness. Because generally, and again, this is backed up by science. If people are self aware, they are able to manage their demons, they are unlikely to have a pathology that's consuming them. Like you could talk with a narcissist all day long about your feelings and they would look at you like you're insane, right? Yeah, because they're not self aware. So if you get the sense that somebody wants to take you for dinner or wants to take you for coffee or ask you some really hard questions to react, whether they will acknowledge it or not, but they're really trying to figure out is, are you coachable and self aware and are they able to connect with you? And there are a million ways to do that. Great slides, great cover letter, showing up for meetings on time. But if you imagine, if you imagine raising money is like dating, I can't think of anything else. Just think about dating. How do you get somebody to actually like you? You listen, you're open, you don't try too hard, you're friendly, you're not clingy and creepy. I mean, all these things, right? Dating, really, if you can't think of anything else, think about how you handle yourself in the world where you're trying to make friends and use those skills to get people to give you money because then you'll be authentic and you're much more likely to succeed. So true. As you were describing, talking it through, I was thinking of so many founders I know that don't have that self awareness. Right. And that's one of their downfalls. They can't take the feed feedback, they end up fighting with investors, they don't get along with their founding team. We've all seen that story. Well, I think that what's interesting is again, remember, if you know the industry indexes and people can come in and look at Steve Jobs. I wouldn't say that Steve Jobs was the most, from what I've heard from friends to work with them by far. He was not a very empathetic person with stamp and people skills, but what he had was tremendous empathy of understanding what customers wanted from a product cast. And as a result, the biggest difference between Steve Jobs when he got thrown out of Apple and Steve Jobs when he came back is either he realized or the people are going to realize that he needed to be surrounded with people who when he was abusive would say ask for Steve and they go back to work. And, and that's why he was so successful the second time around and he was a genius. The industry will be tolerant, we know. I'm sure you do too. Some really successful entrepreneurs who are narcissistic, sociopathic and manic. It happens because life is also about luck. And sometimes, frankly, people are so talented they can overcome the negativity associated with their faults. But if we're giving advice to your listeners, if we're giving advice to people in an academic setting or an event, I tend to give bell curve advice. There's always going to be an outlier. Outliers can succeed. But if you're asking my advice as the mentor, the middle of the envelope advice is you're much more likely to succeed if you're self aware, coachable and connect with people. Yes, agree, agree. That's so spot on. So let's talk about this market, how you're feeling about this AI world because you've seen a lot of these bubbles like you talked about and then I want to get into where hubside fits into it. Well, it's interesting is, is hub side and why I'm doing it very much relates to my view of the market because, okay, so I've been, look, I've been around software for a long time and I've been watching the development of machine learning, which is really what's happened for a long time. And I've been more and more concerned about the issue of humans and what humans are going to do as machine learning got more and more competent. That's why I took time out from being an investor to be a dean of a business school. We merged the computer science and the business and the art and design schools into a single college because I wanted my students to be exposed to creativity and problem solving in a holistic way. Right. So when I left there and I went back to investing, most of the investments I was making at Roxton Vencers were not large language models. They were businesses that had customers that were using AI to make their offerings better. We call them small language models and it's a very good portfolio. The company's growing very nicely. They've for the most part raised downstream capital because they have customers. And so my view of the market is very much shaped by that experience. I look at what going on now with the rapid commercialization that Gen AI models and what we're seeing is that they have unbelievable benefits, which is they allow us to stand the shoulders of giants. We have access information we never could have gotten as easily before. It's tremendous. But the downside is they're sameness engines. They create commoditized information and experiences and as they leak more and more into the economy, what's happening is they are capturing efficiency gains for themselves because ultimately you become more and more reliant on Gen AI tools. You're going to pay tokens. So they're knitting themselves into the economy and making AI an integral part of the economy overall, which is why you're seeing all the investment in the stock market boom. The implications are that at some point the tendency for monopolization, which is natural. Right. The issue is are they going to take so much value out of the economy that there's nothing left for other people to do or there's not enough for people to do to add value that the economy literally suffers and it collapses under its own weight. That's the big million dollar question. Billion dollar question. So when I look at AI, I look at it from a standpoint of the number one thing that nobody's talking about right now is signal collapse. And what I mean by that is. And you can feel it, you know what I mean? It's this feeling that wait a minute. I used to be really respected for my education or I used to be really respected for my content. I used to be really respected for what I did. How do I signal my competence in the world where AI is hyper smooth and appears polished? Or I just got another fricking LinkedIn post. What a load of crap. This was written by AI. How do I separate what's if you know? So it's signal once, right? We're struggling with what's true, what's real And I think that the same way that the Internet bubble had its leg and came down and then the next leg was social, I think that what's going to happen is this desire for commoditization, for effectiveness is overdone. And as this ends, the next thing that's going to happen is people are going to say, wait a minute, AI is great, but there are things AI can't do. Well, you know, people are the differentiators in our society. Not AI people consume novelty, not AI people, all for people. And by the way, there are a lot of jobs that AI software can't really do. So I think there's going to be a much greater premium on what I call and my partners call originality. Yes, right. And so we think the next big leg is going to be all right. We have the tools, how do we create value, add in a post AI economy and, and I think that's the next biggest wave. And I, and I think it will not just be a software wave. I think it's also going to be a way for creativity, creative performance artists, great plumbers, really good teachers. I could go on and on. Point is that there's going to be much greater understanding that humans and what humans can do is actually going to be worth a lot. And so that's, that's why how, it's how I view the world. And I've always been a futurist. I always look five years ahead. That's why I like the venture industry and that's where I see it going. Which brings me to Hubside. So why do I do Hubside? Well, if you understand that's my worldview and I'm making investments. Well, I found a group of scientists that had invented the world's first engine to be able to identify originality compared to AI in any task and literally in anything. It could be a piece of music, could be an article, it could be anything. And so we've been working for the last less than a year to start to commercialize products so that people can see what's original. So our first product's the Hub Checker and Hub Checker. And by the way, anybody who's interested in this, you go to the website hubside.com you can find out your own originality competency by taking the OIQ Challenge takes five minutes. What it does is it allows you to see how likely you are in an AI environment to create something original. How does your brain work? So that's Product one, that's Help Checker. What we're working on now and we're going towards is the ability to take a piece of content and be able to look at it in real time, almost like a spell checker and say, yeah, there's originality in this, there's something here you couldn't get out of AI. And you know, we think that if we have those two products available in the market, we're now in a position for the next trend, which is train of originality. We're in a position to basically be the umpires or do you try to game? Yeah, I think you're 100% correct. Like we're seeing it now. In the beginning it was all just generate AI blogs, case studies, all this stuff. Now it's swinging back, get the human touch in there, make it a little more original, take the AI content and then have a human rewrite it. It's already starting to swing. So I think you're absolutely right and it's just going to get more so as more AI slope as they call it is out there. Well, it's interesting, you know, again talking with my friends that are, that are professionally psych, you know, or psychiatrists or people who understand clinically human behavior, you know, they're really only. There are only two primary drivers for all of us, our behavior. One is a desire for safety and the other is desire to matter, seeking novelty, you know, See, see what makes me special, what makes you special, what do we exchange that makes us attached? It's something special. I worked for a Japanese company as my first job. And if you could imagine being a middle class kid from Philadelphia, suddenly in London, all my colleagues were Japanese. And so I learned a lot about a lot of subtle things. And my boss one day took me out for lunch and he said to me, he said, aberman son, I need you to understand the secret to success in this world. And I, I said okay, Mr. Nakami, what is it? And he said to me, it's kindness. And I thought to myself, huh, that wasn't what I expected. I had ind. I mean there was nothing about working in a hierarchical Japanese company was kind at all. So I said, ah. And he said no, no, no. And he said, you're stupid. Because he loved me. He said, let me understand, let me explain. He said, kindness is, is giving me a memo without typos in it, or me giving you a bonsai tree as a gift or you seen a really cute Mickey dog? He said, how does it make you feel? And I said, well in each case it makes me feel like it's special to me. And I feel respect and I feel like somebody spent some time preparing it. He said, exactly. That's what makes society go, is when we are kind. And I realized what he was really getting at is what we would now call novelty. So that's when we react so badly to the work slope. It's like, why am I reading this? Yeah. You didn't even write it right. Exactly right. Yeah. No, no, you're really, you're really onto something. I'm actually happy to hear that because that's, you know, something we're all a little worried about. We're actually at time. I can't believe it. I really enjoyed this conversation a lot. I can tell you must have been an excellent professor. You have a good way of explaining things. Oh, thank you. Where can listeners go to learn more about Hubside? Yeah, so it's human upside. Hubside.com, human upside. Human upside. So that's where the name comes from. Hubside. I like that. Okay. Yeah. Well, the good thing is I have a great marketing company called Req. And you know, I, I had a different name and they said, no, no, no, no, no, no, no, no. You're going to name the company this and it's working out. I like that. Give me their profit. So hubside.com there's lots of information. We've, we've made available free versions of the self test and also there's a version of the product called Hub Checker where you can shake it and use it as a way to learn about 10 of your friends or 10 co workers and learn about how they approach problem solving. It's really, really cool. And it's AI proof. That's the thing. You can't cheat it. That's great. It's really, really cool. And then I'm on LinkedIn. You can find me there. That's the place where I tend to do my most social. I'll probably launch a substack soon, but right now anything I'm thinking about is on LinkedIn. Awesome. I really enjoyed this. Please come back in a year or two anytime. Get an update. All right, well, I will. Thanks for letting me share with your audience. It's always a pleasure. Thank you. You've been listening to startup Success to make sure you don't miss out on future episodes. Subscribe to the show in your favorite podcast player. Like what you hear, Tap the number of stars you think the show deserves in Apple Podcasts. For more tools and resources for your own startup success, check out Burkeland Associates.com. thank you so much for listening. Until next time.