AI Value Investing Memo – Week Ending 2/June/2025 (Weekly Focus)

Intro & Market Context

This week in AI, the market accelerated along its current high-anticipation trajectory, with a cluster of activity in startup fundraising, M&A, and fresh enterprise adoption. While no single "breakthrough" event dominated headlines, several key themes emerged: (1) Venture capital continues to quietly roll up smaller firms into AI-centric portfolios, (2) corporate M&A is ramping up in the AI space, (3) established tech giants are focusing on massive compute expansion as agentic AI demand surges, (4) novel applications (psychiatry, fintech, legaltech, and biology) are moving into commercial and even IPO-ready scale, and (5) regulatory and privacy debate continues to follow AI's march into sensitive sectors.

General market sentiment remains optimistic but increasingly bifurcated: public equities in megacap AI (NVDA, MSFT, GOOG) are expensive, while an undercurrent of deep value persists among small caps and M&A targets. Smart money is increasingly shifting attention to niche, high-moat AI firms not yet in Wall Street's spotlight, particularly those with strong cash flows or unique IP.

1. Key Value Signals

Startup Fundraising Surge: Early- and mid-stage AI startups (Rillet, Snabbit, Inven, Valla, Symbl.ai) raised significant capital despite macro volatility (TechCrunch, Tech Funding News, TechCrunch).
Venture Roll-Ups: Khosla Ventures and Elad Gil investing in AI-powered rollups of mature, cash-flow-positive companies — a signal that expertise and customer lists are the next moat (TechCrunch, TechCrunch).
Compute Demand Surge: Fintech, health, and banking adopting agentic AI, creating enormous compute needs (100x growth potential), favoring scale datacenter and semiconductor players (FinTech Futures).
M&A: Strategic AI Acquisitions: Leidos (LDOS) acquires AI/cyber firm Kudu Dynamics. Invoca acquires Symbl.ai — precedent for AI-focused M&A across sectors (Axios).
AI in Regulated Sectors: Major inroads made in banking (fraud, loan origination), health (psychiatry, biology), and legaltech (Valla, legal recourse for employees) (Nature, Rude Baguette).
Data Privacy & Regulation: Growing calls for comprehensive regulation — creates compliance and consulting tailwinds for niche AI/data security players (Dark Reading).

2. Stocks or Startups to Watch

Public Companies

Leidos Holdings (NYSE: LDOS)
Trigger: Acquired AI-focused cyber firm Kudu Dynamics for $300M cash (Axios).
Stats: P/E ~16, ROE ~16%, Market Cap ~$17.6B (as of May 2025): stable, defense/cyber/AI mix, decent value for its sector.
Watch for: Expanded AI defense/cyber offering, M&A synergy upside.
Invoca (private, potential IPO/M&A target)
Trigger: Acquired Symbl.ai (AI-powered customer experience, $23M funding) — raises profile as a revenue automation leader.

Notable Startups & VC-Backed Companies

Rillet
Trigger: Raised $25M Series A (Sequoia, <1 yr post-seed). Focus: AI for finance/accounting automation (TechCrunch).
Value Note: Early institutional traction + rapid fundraising, in nascent AI-for-services vertical.
Valla
Trigger: $2.7M seed to democratize legal recourse using GenAI; focus on employee rights (TechCrunch).
Value Note: High regulatory moat, early traction, strong founder narrative.
Inven
Trigger: $12.75M for AI-native deal sourcing (potential to disrupt PitchBook and legacy PE data vendors) (Tech Funding News).
Value Note: Unique vertical for AI, early validation.
Symbl.ai (acquired by Invoca)
Trigger: AI-powered conversation intelligence; validates VC-funded exit path for vertical AI.
Agentic AI, Data Privacy, and Fraud Detection Startups
Trigger: Fintech demand for agentic AI, "AI factories", and fraud detection = greenfield for private AI infra startups (FinTech Futures).

3. What Smart Money Might Be Acting On

AI Rollup Trend: Major VCs (Khosla, Elad Gil) are moving beyond backing pure-play startups to quietly acquiring and aggregating legacy companies, layering AI products on top (TechCrunch, TechCrunch).
Why: Lower risk than bleeding-edge AI bets, immediate cash flow, and quick access to hard-to-get enterprise customers.
Enterprise AI B2B: Bet on startups with regulatory/vertical moats (finance, healthcare, legal) rather than direct consumer GenAI, where hype/competition is fierce.
AI-Driven M&A: Incumbents in security, defense, and SaaS (like Leidos, Invoca) are primed to bolt on AI capabilities quickly — making small-cap/public firms with unique IP potential targets.
Compute Infrastructure: Buy or build into companies with data center, AI-chip exposure, or proprietary algorithms serving banks, fintechs, or life sciences.
Compliance/Privacy: Funds may flow to specialist consultancies and SaaS with privacy/compliance focus, as regulatory overhang tightens.

4. References

5. Investment Hypothesis

The Cream Rises: Amidst AI hype, value is accruing fastest to (a) established firms acquiring AI/niche tech, (b) small/midcap vertical SaaS/AI companies with regulatory moats, and (c) strategic AI-powered rollups with serious institutional expertise and cash flow.
Key Thesis: Ignore the frothy megacap multiples; focus on under-followed AI stocks and private companies with:
- Proven B2B or SaaS revenue,
- Unique IP/defensible verticals,
- cashflow or recent M&A/VC validation,
- are potential rollup or acquisition targets.
Tailwind: Surging demand in regulated and semi-regulated verticals (health, finance, defense, legal).
Headwind: Regulatory/ethical scrutiny could increase cost of doing business for generalist GenAI players — favoring those with purpose-built compliance tools or vertical knowledge.

Bottom Line: - Watch for M&A in defense/cybersecurity, SaaS, and AI-powered B2B plays (Leidos, Invoca, Rillet). - Track VC-backed AI rollups as stealth vehicles for value creation and future IPO/M&A pops. - Seek out early-stage startups in vertical SaaS or legaltech deploying AI in compliance-intensive settings. - Physical compute/infra players serving agentic AI (AMD, data centers) continue to benefit from secular demand.

Broad Summary of This Week's AI News: The week was dominated by continued VC confidence, strategic M&A, and institutional moves in vertical AI applications, with significant attention on small-cap and startup valuations. Macroeconomic backdrop remains strong for AI demand, but value opportunities lie beneath the surface in rollups, newly funded vertical SaaS, and compliance-driven niches. Regulatory risk rising but also carving new investable moats.