Deep Dive: As Smaller VC Firms Build AI Tools To Compete, Founders Should (Mostly) Benefit

Challengers like Alpaca VC, DVC and Topology Ventures are going beyond ChatGPT with in-house tools. For founders, that means opportunity, with a sprinkling of AI slop.

Alpaca VC partners Ryan Freedman and Aubrie Pagano are betting their firm’s future increasingly on AI. Credit: Alpaca VC

The Upshot

This summer, venture capitalist Aubrie Pagano snagged the chance to invest in a buzzy funding round with a major assist from AI.

For their crucial pitch meeting with a frontier science lab, Pagano brought a list of 50 high-value prospects – academics, pharma execs and former FDA leaders – and the exact route by which her firm, Alpaca VC, could connect its founders to each.

The startup made room for Alpaca to invest $1 million. It was only afterward that its founders found out that Pagano had used an agent from the firm’s proprietary AI system, known internally as Gordon, to help secure the deal.

“They said we were the only investors to come prepared with that type of information,” Pagano says. The founders have since given product feedback on Gordon’s results, helping Alpaca to improve the list.

Seemingly every VC firm has that partner (or several) who drafts LinkedIn ‘thought leadership’ posts in Claude, runs meeting notes from Granola through NotebookLM, or calculates market projections in a custom GPT.

But Alpaca, investing out of a $78 million fund, and a growing number of boutique and emerging VC firms are looking to compete – and punch above their weight with founders – by making outsized bets on building and investing through their own advanced AI tools.

These firms are fine-tuning their own models and setting up MCP servers, and managing long-running agents that automate entire processes, from back office reporting to their investment memos and content calendars.

We want to give everybody their own personal AI analyst, so they can look at companies the way a partner at a16z would.”

At DVC, a $75 million fund that’s an early backer of Perplexity, AI recommendations have helped the firm write preemptive checks into some of the firm’s fastest-growing companies, like Higgsfield AI, just before revenue or valuations soared.

And at Topology Ventures, a frontier tech firm that raised a $75 million fund last year, managing partner Casey Caruso believes her internal AI CRM, called Fiber, is so good at predicting founder movements that it could raise millions in its own right.

“If I launched it and incubated it, I seriously think it could [produce] a venture scale return,” Caruso says. “But it’s so much alpha for us, that we decided to keep it in-house.”

To build Fiber, Caruso took a chance by poaching a 24-year-old quantitative engineer from Citadel, the well-paying hedge fund. DVC worked with a former senior DoorDash technical lead. Alpaca principal Josh Jagota led his firm’s effort; Alpaca is now hiring an AI-focused analyst or engineer to consolidate his work.

They’re competing with the big VCs for talent, too: while a16z and Sequoia declined to talk about their internal AI setups, it’s safe to assume that multi-stage blue-chip firms are working on their own automation processes and tools, affirms Kleiner Perkins CIO Moustafa ElBialy.

In October, Union Square Ventures announced it had hired a new AI Lead. At Thrive Capital, a major OpenAI investor, Head of AI Linus Lee recently put out a call on LinkedIn for AI engineers – despite already operating a system, Puck, that already processed 10 billion tokens across thousands of tasks, per Lee’s post. (Thrive declined to comment.)

Across the thousands of members of VC Platform, an industry community, the percentage of professionals holding AI-related titles has increased from 1% to 6% over the past year, says the group’s vice president Annie Shapiro.

The AI-ification of venture capital firms is happening.

But is it a positive for startups at large? Or does it just free up more time for VCs to ski in Tahoe?

We checked in with a bunch of founders, investors, and industry vendors, to ask about the trickle-down effects. Key takeaways:

• AI is probably analyzing you and your startup’s pitch deck

• Tech-savvy firms should be offering you access to their best AI tools

• You’ll need to be vigilant about automated help from VCs not devolving into AI slop

We break all that down in a deep dive for Upstarts paid subscribers below, one of our most ambitious exclusives yet. Read on.

Not subscribed yet? Try one month on us fully free, or catch our end-of-year sale: 20% off for a limited time. And stay tuned for a follow-up interview with a founder taking a different approach — an AI agent raising its own fund — later this week.