The AI sector has gotten hotter during the last 12 months. But unlike lots of past enterprise fads — like crypto or web3 — the AI sector had quite a lot of large startups and legacy players already energetic when the market began to froth.

There have been AI exits and there are even whiffs of potential government regulation. This dynamic makes it a way more complex ecosystem for founders and investors alike — especially considering lots of them weren’t listening to AI even a 12 months ago.

Entrepreneurs have flocked to the sector, and early-stage investors try to chop through the noise to seek out which startups are merely riding the hype and which have the potential to grow into substantial corporations.

One thing, not unlike other sectors, is that investors are searching for corporations with a moat, or competitive advantage over rivals. With deep-pocketed players like Microsoft, Google and OpenAI also actively constructing within the category, investors need to be certain that they aren’t backing corporations that might be made irrelevant by the actions of one among 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 which can be constructing on top of existing large language models.

“Constructing on another person’s model to resolve a business problem, you [have to] understand it’s a race to the underside,” Wake said. “You possibly can create an interesting business but not necessarily a transformative business. For me, that doesn’t seem incredibly interesting.”