Startups learn the hard way that relying on OpenAI’s tech can burn them

ChatGPT takes out a bunch of startups in one fell swoop

A recent update to OpenAI’s ChatGPT that allows users to upload PDFs and ask questions about them has sent ripples through the startup ecosystem. This development poses a significant, if painfully predictable, threat for many companies, particularly for “wrapper startups” that have built their businesses around a feature gap in ChatGPT.

The change serves as an essential reminder to founders and investors: Nothing can serve as a substitute for a sustainable company with a solid, stand-alone product.

“Wrapper products” provide a service by “wrapping” around an API like ChatGPT, leveraging the underlying technology to offer a service that isn’t directly available from the API. The recent update to ChatGPT exposes the vulnerability of such startups: In a flash, their unique selling proposition can be made redundant by a feature update from the underlying technology provider.

That’s neither new nor all that interesting. Startups build their fortunes on extending the features and functionalities of bigger corporations all the time, and some of them can raise money at valuations of billions of dollars. The hope is that the corporate overlords spot what the startup is doing and buy them. The plan often fails in a number of explosive ways.

So, what does OpenAI’s move mean for startups and their founders?

For one, it underscores the importance of building a business model with a solid foundation, one that does not rely solely on the gaps in a third party’s technology.

Your startup’s value proposition should be broader and deeper, and you should provide solutions that are not easily replicated or integrated into existing technologies. In fewer words: Build a company, not a feature.

OpenAI reminds us of the need for real innovation: Do something hard instead of throwing together a quick and easy solution and building a company around it. In an industry as fast-paced as tech, resting on your laurels is not an option. As a startup founder, you’ve got to continuously innovate, evolve and adapt to stay ahead of the curve.

If a single feature update can wipe out your company’s value proposition, it’s a sign that you need to go back to the drawing board and come up with a more robust and innovative solution.

Ultimately, it’s all about differentiating yourself in the market. Startups inherently must stand out, and it’s your job to ensure your company is pointed in the right direction. There are many paths to that particular nirvana — companies can disrupt a sector with superior technology, exceptional customer service, novel business models and so much more. Differentiation will give you a competitive edge and protect your company from the whims of technology updates.

Investors, too, should take note. If a startup’s tech is built around AI, then they should probably be building their own AI tech. It can be very tempting to back startups that are quick to market and offer a value proposition, but that can backfire if a company’s foundation is built on the tech of another — especially in a rapidly evolving industry like AI.

This ChatGPT update is hopefully serving as a wake-up call to startups and investors alike. Failing to remember the basics of running a business will leave startups — and the investors that backed them — holding the proverbial bag.