AI: Capital Bonfire?

AI is the biggest opportunity in 20 years. It could also kill countless VC funds.

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I took a sip of some yummy espresso last Thursday and plopped down at the laptop. Time to dig into a deal memo from a VC I really respect.

He laid out a clear view of AI’s future. And if you’re an investor, it’s scary. 😲

Tons of startups are all racing to become the next hot thing in AI. They’re all doing the same things with the same tools.

Most will fight each other to the death. With differentiation nonexistent, margins are headed to zero.

Now, what if we add VC’s with billions and a bad case of FOMO?

A bunch of massively overfunded companies will fight to the death. No one will make money.

And many AI-heavy funds will be destroyed. Or as this investor put it, we are headed for a “capital bonfire.”

I tried to poke holes in his argument. But I couldn’t.

It’s not that hard to integrate AI tools into software. A founder I know did it in just 6 hours using OpenAI.

If you’re not something more than a wrapper for OpenAI, you’re not going to make it.

Geez Francis, you really hate AI, don’t you?

Not at all! I think ChatGPT and similar technologies are an incredible revolution.

But just because a new technology is incredibly useful doesn’t make it profitable. Toasters are very useful, but making them isn’t a great business.

There are too many other companies making the same thing.

Aggravating the defensibility problem are massive valuations.

I’ve seen AI companies with no revenue raise “seed” rounds at $150 million or more. I even saw an AI hardware company recently raising “seed” at over $400 million!

These valuations don’t make sense for companies that are barely off the ground. As Fred Wilson of Union Square Ventures has proven, investors can’t make money with $100 million seed rounds.

So who wins in AI?

Big tech will be huge winners. Microsoft practically owns OpenAI.

It has also integrated AI into all its Office products. You can even ask your calendar to prepare you for an upcoming meeting!

Microsoft owns the platform many people already use. Then they serve this captive audience some great AI features.

That’s a winning model.

Another winning model is focusing on data. I’m looking for companies focusing on unique data sets, data cleaning, and better data processing.

Data fuels every AI model. Better data means better outputs.

Even if many AI companies go bust, selling data services can still be a great business. Airlines have a way of going bankrupt, but Saudi Arabia’s doing pretty well selling them fuel.

Let other investors drop money onto every AI startup from a helicopter. I’ll be taking careful kill shots at big game.

After all, we only have so many bullets.

Where do you think AI is headed?

Leave a comment and let me know!

More on tech:

Where Should Startups Put Their Money Now?

“How Can I Be Helpful?” Gets Put to the Test

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