FAEM - My Favorite AI Business Model
How to make your company faemous (yes I meant to spell it that way)
Happy Sunday and welcome to Investing in AI! If you are new to the newsletter, I’m Rob May (please connect) and am the founding partner at HalfCourt Ventures, a Seed/Series A fund focused on AI investing since 2016 (people said we were crazy back then).
If you haven’t checked out our podcast recently, we have an excellent episode up with Kevin Novack from Rackhouse VC. I’m taking it slow in December and will not have any new interviews, but will have a few podcast episodes focused on year in review and next year predictions, so stay tuned.
Today I want to write about an emerging AI business model that I really really really like. I’ve seen 3 companies doing it and I’m sure many more are going to figure it out as well. During the thesis development meetings at HalfCourt Ventures, we decided to call it FAEM - Focused Automated Extension Marketplaces. I’ll explain what that means but also, if you have a better acronym let me know and I”ll update this post and credit you.
Here is how FAEM works. First let’s talk about the power of human-in-the-loop. We loved the HITL business model in previous years because it gives humans some final oversight of AI outputs, and helps collect more proprietary data for model training from the human input. The problem with it though, is it limits scalability and can sometimes lose much of the benefit of automation.
FAEM is a business model that takes less and less human-in-the-loop over time. It starts with an AI tool that needs some customized inputs. Let’s say its an image generation tool that needs a text prompt. It turns out some people are better at prompts than others, so a little over a year ago we started seeing things like prompt marketplaces. Instead of writing your own prompt, you could find prompts other people had written and put those into the tool as-is, or with your own tweaks.
This business model of having a marketplace of user generated content is powerful and can often be a great source of defensibility. Zapier is one of my favorite examples from the last wave of technology companies. By allowing users to create Zaps, the usefulness of the core Zapier platform just kept increasing in value. Now lets take the marketplace idea a step further and apply it to AI companies, and lets use it to replace the human-in-the-loop.
FAEM business models are marketplaces for small extensions that allow for more automation on a core AI platform. We say small extensions because if the extensions were large and complex, they should probably be part of the core platform. Small extensions allow for lots of variability. And if the platform can support lots of useful small extensions, it becomes defensible. Why? Because no extension represents a large enough proportion of the use cases to incentivize a competitor to replicate it.
For our acronym though, we chose “focused” over “small” because everyone wants FAEM and no one would like to be the SAEM.
The first concrete example I saw of this was Screens. The way it works is, Screens has a platform that checks legal documents for certain criteria. Then they have a marketplace where lawyers can write a Screen to run on the platform. For example, here is a screen for customer contract checks to run in M&A diligence. The screen is written by a human lawyer, then ingested into the Screens platform to check the customer contracts you upload, and make sure they meet the criteria specified by the screen.
This is an interesting twist on the human-in-the-loop model because the human isn’t in every execution loop, but their work is. It’s the best way I’ve seen to combine human and machine interactions.
There is some nuance here in the business model though that I want to point out. Just having a UGC marketplace does not make you FAEM-worthy. FAEM business models meet the following criteria:
There are thousands of possible human inputs to the AI platform.
Those inputs are complicated enough that having one person write them well one time is valuable.
The AI automation platform takes care of a significant portion of the work post- marketplace extension.
So, for example, if you have a marketplace but writing that marketplace extension is 85% of the work and the AI is 15%, its still too human focused to really benefit from the AI. What we are looking for in FAEM companies is that the AI is really powerful and beneficial but, the human inputs to it might also be complex or variable enough to support a marketplace, and that the lack of human inputs could otherwise be a barrier to usage. We believe this creates a virtuous cycle of extensions that make the platform better, which leads to more defensibility over the long term.
To look for FAEM opportunities, think about areas where AI could automate much of the process but still needs a lot of human expertise at the top. We’d love to see a product management / automated product builder type of company with a FAEM approach.
We’ve seen two more companies already deeply using the FAEM model, which we will stay mum on for now as we are considering investments. If you have a business that can be FAEM-ous, please reach out as we would love to talk to you about it.