Amidst the claims about artificial intelligence that surround us all today, what can we confidently say at this early moment? The first step is to choose the right frame.

This comes from Joseph Schumpeter, the pioneer of entrepreneurship economics, who wrote in 1942: “Innovation is the market introduction of a technical or organizational novelty, not just its invention.”

That is, we can frame the collection of inventions we refer to as “AI” as distinct from the innovations that result from their introduction into the market as commercial products. Invention is about creating new capabilities, whereas innovation turns those capabilities into tangible value.

Schumpeter developed the concept of “creative destruction,” or the process by which new innovations destroy long-established practices. Creative destruction is a driving force of growth in a capitalist economy.

Today, AI is that engine of creative destruction. It is an amazing invention that allows things to be done that were not possible before. AI right now is moving from invention to innovation, following the pattern of classic business transformations.

• The steam engine was an invention, and the steamship was an innovation, as it used that engine to open inshore waterways and transform trade.
• The internal combustion engine was the invention; the Model T assembly line was the innovation.
• Oversimplifying a lot, , who created ’s original PC hardware, was the inventor; , who created a mass market product through design, marketing and distribution, was the innovator.

Right now, AI is the invention. CEO has . The question is where we can put it to work to solve a problem with some economic value. It can be as simple as something that saves some time on a repeated task, or as novel as a medical breakthrough.

Let me share one recent example of turning AI inventions into innovative services from our portfolio at . provides supply chain planning software. Companies use Netstock to forecast demand, avoid stock-outs and reduce excess inventory. It is a SaaS application that an analyst uses to optimize and re-order inventory in real time.

A challenge for customers is that performing inventory analysis requires significant training for the user to understand the trade-offs and to adapt to changing conditions. In the past, only experienced staff knew enough to correctly resolve the choices between too much and too little inventory. But AI is well-suited to analyze data on successful and unsuccessful choices. Netstock built a customer AI tool to do this work based on its trove of data, both past and constantly updating.

Netstock applied AI to expand the set of users beyond those with deep supply chain expertise. It created a conversational AI experience, , that makes a specific recommendation to the user in natural language. The user receives a proactive message such as: “You’ve ordered too much of item #7971, you should cancel that order and save $7,800.” The user can still verify the analysis directly, and that has built trust in the recommendations over time.

Customers love this AI functionality. Users appreciate the time it saves and the improved outcomes it delivers. It has changed how they work with the software and how they manage their inventory. Recently, Netstock received top recognition for this tool from an independent, tell-it-like-it-is .

The Opportunity Engine is included in the standard offering, introducing the invention to customers in an easy-to-adopt format. Netstock has delivered more than 825,000 opportunities to customers since its release. In late January, Netstock unveiled its new , additional AI capabilities that allow users to interpret dashboards and analyze and troubleshoot individual items. Netstock is now charging for these capabilities and generating incremental revenue — moving from invention to innovation.

The framework of innovation vs. invention can also help to explain why we hear such a wide range of opinions about AI, from effusive and idealistic to skeptical, and at different points on the spectrum from inventor to innovator.

Many are writing about AI as an invention, including in his book “.” In contrast, the startup economy has produced some coverage of AI as an innovation, as in an by of that describes changing the market pricing for AI solutions from a seat-license model to an outcome-based model.

Early days

But AI as innovation has not yet arrived as the main event in private equity, where capital values proven business models, not just the promise of innovation.

I have asked each of the technology bankers I have met over the past several months, “Have you seen anybody in private equity make money on AI yet?” Without exception, the answer is “No.”

One banker said: “AI is not even in our valuation matrix, because it is not showing up in the income statement.”

When we explained how one of our companies is in fact selling their new AI offering with real uptake by customers and that it has accelerated revenue growth, the banker replied, “Well then, you are in the 1% of companies.”

What this suggests is that the market introduction of AI — the innovation — is still so early that the capital markets aren’t seeing it show up in financial statements in any broad or consistent way. Instead, markets are tracking the trend and watching to see when innovations mature. It is still early days.

The entrepreneur’s moment

So, this is where we find ourselves at this moment. AI is by any measure the major invention of the day. For those of us leading, investing in or developing businesses, the opportunity of the moment is to translate that invention into innovation.

The fact that AI is not “ready for prime time with our customers” is not the problem. It is the opportunity. AI inventions are broadly available now to us all, and the insight about how to apply it to a business problem is the entrepreneurial moment for each of us and our organizations.

Where can you use it to solve a problem you understand?

An entrepreneur is not someone who starts a company or gets angel financing. It is someone who puts an invention to work to produce a market outcome.

Or, as Schumpeter writes: “The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention.”

Have you put AI to work on some activity that makes a difference to your revenue or cash flow? Well, if you have, you belong to that group Schumpeter so admired. In other words, congratulations — you are an entrepreneur.

co-founded in 2014 and is managing partner. He has served on numerous private and public technology company boards, and currently is a director of , , , , and . Previously, he was a partner and member of the investment committee at . He also worked at and at . Morse serves on the board of directors of and as member of the advisory board for the HMTF Center for Private Equity Finance at . He attended , graduating summa cum laude with a B.S.E., and , where he earned his MBA and was an Arjay Miller Scholar. Morse lives in Austin, Texas.

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Technology-focused is the latest, announcing it has closed on $5.3 billion of new capital commitments for both its Capital Partners VII LP and Emerging Buyout Partners II LP funds.

The Menlo Park, California-based private equity firm has made more than 350 investments in its two-decade-plus history. It invests in tech companies through a series of different funds and strategies including buyout, emerging buyout, growth capital and credit. It now has $19 billion in cumulative capital commitments.Ěý

Some of the firm’s most recent investments include: Australia-based workforce management software developer ; Waltham, Massachusetts-based compensation data provider and U.K-.based processor of rental payments .

The new funds

The Capital Partners VII LP closed with $4.4 billion of equity capital commitments and will continue the firm’s strategy of making majority buyout investments in lower-middle market and middle-market tech companies.

The Emerging Buyout Partners II closed with $920 million of equity capital commitments. That will enable Accel-KKR to invest in software and tech-enabled services companies — with a special focus on small-cap companies.

“In raising these two new funds, we will continue our long-term strategy of working in partnership with management teams of the companies in which we invest, aggressively supporting their growth objectives by providing capital and operational support to fuel accelerated organic and inorganic growth,” said , co-managing partner at Accel-KKR, in a .

As financing options decline for startups and share prices of publicly traded companies drop, many think the M&A market will heat up later in the year. That likely is especially true for private equity firms, as many have raised huge funds recently that could take advantage of bargains in the market.

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Here at Crunchbase News, we write primarily about venture capital. But every so often, our articles include mentions about private equity firms (e.g. , ) and hedge funds (Tiger Global Management has been investing a lot in tech) when they invest in startups.

So while the two are set up similarly and aim for similar outcomes, the way they operate is different. Let’s take a look.

Venture Capital: Move Fast, Break Things, And Make A Lot Of Money Doing So

Venture capital is money that often helps get a business off the ground. A VC firm invests early in a company’s life and gives it the critical capital it needs to start and, with luck and hard work, grow. VC firmsĚýplace a premium on growth, often at the expense of profitability, so they’re more inclined toĚýinvest in companies with high growth potential, and direct companies to grow quickly, if not always sustainably. Venture capitalists are playing the long game, investing early in companies that could one day could deliver huge returns.

VC firms are often associated with technology startups (probably because so many tech startups are backed by venture capital) but VC dollars go to other kinds of ventures, too: and are two examples of startups that attracted venture capital, even though they aren’t tech companies (no matter how much WeWork tries to brand itself as one).

The money in a VC firm’s fund comes from its limited partners,Ěýwhich, depending on the size and setup of the fund, can include high net worth individuals, their family offices, and institutional investors like charitable or university endowments, pension funds, fund-of-funds, and other money management firms. General partners—the folks managing the firm—traditionally make an investment in their funds as well, to ensure they have “skin in the game,” aligning interests between GPs and LPs. VC firms tend to make “riskier” investments that are spread out over severalĚý companies. That way, if one or multiple startups fail (which they probably will), the whole fund doesn’t sink. And if just one or two companies from a particular VC fund are a huge success, that’s excellent for the firm.

Because the venture capital market has grown more crowded, VCs often compete with one another for allocation in funding rounds. Many investors try to differentiate themselves by offering a suite of services, often tailored to a specific subset of companies, which they use to justify taking significant stakes in their portfolio companies. VCs may also take seats on a company’s board of directors. In theory, this should grant them additional governance and control rights over their portfolio companies, but the rise of multi-tier voting share structures (typically favoring founders) and a recent tendency to defer to founder authority can mean that directors have less power than they once did.

Private Equity: Steady As They Go

Private equity firms, on the other hand, focus on more established businesses that need a capital boost and reorganization so that they can be sold at a profit. They’re something like house flippers.

Asset management company how private equity works in three steps: Buy, Change, Sell. A private equity firm will buy a stake in an established company (usually a much bigger stake than a VC firm would), restructure and revamp the business so that makes more money and then sell it at a profit (e.g. through an IPO).

Private equity is seen as less risky than venture capital, because private equity investors are investing in a company that’s already established some business fundamentals—not two founders with a laptop and a dream. Private equity firms will often take a larger stake in companies, according to .

is a good example of a company that has a history with venture capital and private equity. Ping started off as a venture-backed company, raising its $5.8 million from in 2004. It raised $128.3 million in venture capital funding from 2004 to 2014, with the amounts fluctuating each r.

The company was acquired by private equity firm Vista Equity Partners for in 2016. How Vista restructured Ping is unclear, but the company had a nice exit just a few weeks ago. Its IPO raised $187.5 million before trading started, and its stock popped 25 percent on its first day of trading. The company had a market cap of nearly $1.25 billion as of October 16.

However, the lines of private equity and venture capital are becoming increasingly blurred.

, for example, received a investment from private equity firm in September. The company was already well-established, having raised money from venture capital firms like and . Postmates also received hefty investments from BlackRock and hedge fund . But Postmates also pulled in a ton of venture capital, and is commonly referred to as a VC-backed startup.

How much more the two will overlap in the companies they choose to invest in is unclear. But both are evolving as private companies chasing profitability evolve.

Jason D. Rowley contributed to this article.

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Sophos’ board of directors intends to vote unanimously to approve the deal, according to a from the company. Thoma Bravo, which has offices in Chicago and San Francisco, will pay $7.40 per share for the company.

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Sophos, which is traded on the , went public in 2015 with a valuation of $1.6 billion at the time of its IPO. The company’s products defend against malware, data leakage and spam.

“Sophos is actively driving the transition in next-generation cybersecurity solutions, leveraging advanced capabilities in cloud, machine learning, APIs, automation, managed threat response, and more,” Sophos CEO said in a statement. “We continue to execute a highly-effective and differentiated strategy, and we see this offer as a compelling validation of Sophos, its position in the industry, and its progress.”

Private equity firms often step in and acquire companies to streamline operations and turn the ship around into a more profitable enterprise. In the case of Sophos, the firm’s is slow and the company is only marginally profitable. That said, its operations generate lots of cash, which could give Thoma Bravo the sort of maneuverability to shake up the company’s growth while not over-burdening the company with debt.

Thoma Bravo has acquired more than 200 software and tech companies, according to the statement. The firm has also invested in companies including and .

Sophos has at least 13 companies, according to Crunchbase, with its most recent acquisition being y in June. Although the company went public in 2015, raising $125 million with its IPO, it’s been around since 1985.

And this isn’t Sophos’ first rodeo when it comes to private equity. acquired a 70 percent interest in the company for $580 million in 2010, according to the , valuing Sophos at $830 million.

Both the public and private markets do have an appetite for cybersecurity companies– went public in June and its shares have soared since then.

Some recent late-stage cyber security rounds include F last month.

With investors putting capital into high-growth private cybersecurity companies and public investors cheering the flotation of Crowdstrike, it looks like a hot time for startups focused on securing our increasingly digital world.

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Vista is best known for its multi-billion dollar funds and deals, but this smaller fund is a double-down on a different model. The new fund, dubbed , is the successor to the aptly named , a smaller (around $500 million) vehicle that was as focusing on “companies too small to fit into [Vista’s] flagship funds.”

Returning to the newly-built Endeavor Fund II, that the capital pool will target firms with between $10 and $30 million in ARR (annual recurring revenue), at a price range of “$30 million and $100 million.” Recall that private equity shops do not usually invest in companies the way that venture capitalists do; Vista wants to buy whole firms, strip them of costs, change their growth curve, and then sell them, spin them out, or take them public.

It’s a ; the firm’s leader Robert Smith has even for how he views the market for software companies: “Software companies taste like chicken […] They’re selling different products, but 80% of what they do is pretty much the same.”

Don’t tell your favorite startup that, but for the Austin-based Vista Equity Partners, selling software and building SaaS companies is something that can be beaten into a formula.

Comparisons

Vista’s current real fundraising effort is that it has already raised $14 billion for, sums of money that tower above its new, smaller fund. But small deals can make for good returns, and given the that private equity investors are sitting on, it’s perhaps not surprising that Vista wants to take on all stages of the tech buyout market.

Private equity, as an investing class, has taken a greater shine to growth-oriented tech companies in recent years. Traditionally focused on EBITDA (profit) multiples, software companies tend to trade for less-certain revenue multiples. Notably, despite that valuation deviation, .

How long the love-affair can last is probably predicated on the stock market staying near record highs; change the pricing of comps, and the market value of some PE holdings will dip.

For now, however, Vista is sitting pretty with a new, larger focused fund aimed at smaller companies, and a larger fund incoming with enough weight to derive its own gravity. Keep in mind that in markets, it’s always brightest right before night comes.

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