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The AI sector has gotten hotter over the last year. But unlike many of past venture fads — like crypto or web3 — the AI sector had a number of large startups and legacy players already active when the market started to froth.

There have been AI exits and there are even whiffs of potential government regulation. This dynamic makes it a much more complex ecosystem for founders and investors alike — especially considering many of them weren’t paying attention to AI even a year ago.

Entrepreneurs have flocked to the sector, and early-stage investors are trying to cut through the noise to find which startups are merely riding the hype and which have the potential to grow into substantial companies.

One thing, not unlike other sectors, is that investors are looking for companies with a moat, or competitive advantage over rivals. With deep-pocketed players like Microsoft, Google and OpenAI also actively building in the category, investors want to make sure they aren’t backing companies that could be made irrelevant by the actions of one of the larger entities.

Chris Wake, the founder and managing partner at Atypical Ventures, told TechCrunch+ that while his firm is currently taking a step back from AI to see how things play out, he doesn’t see much appeal of startups that are building on top of existing large language models.

“Building on someone else’s model to solve a business problem, you [have to] understand it’s a race to the bottom,” Wake said. “You can create an interesting business but not necessarily a transformative business. For me, that doesn’t seem incredibly interesting.”

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