The AI Gold Rush

Venture capital investment in AI is exploding. But are we setting ourselves up for disaster?

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From a report out this morning in The Wall Street Journal:

Analysts at research firm PitchBook predict that venture investment in generative AI companies will easily be several times last year’s level of $4.5 billion. That is driven in part by Microsoft’s $10 billion investment in January into OpenAI, the startup behind the wildly popular ChatGPT bot. In comparison, such investment totaled $408 million in 2018, the year OpenAI released the initial version of the language model powering ChatGPT.

VC’s are funding startups with no revenue at valuations of $50 million, $100 million, or more:

LangChain, an open-sourced library for software developer tools with no revenue, recently closed a $10 million round at a $50 million valuation, according to people familiar with the matter. A few weeks later, venture-capital firm Sequoia Capital swooped in with more funding and quadrupled the valuation to around $200 million, they said. 

I have no idea how to play AI right now.

I see what seems like the coolest generative AI tool ever. Then, a week later, I see another tool that blows that away.

When a market is moving that fast, it’s almost impossible to place a bet. So for now, I’m sitting back and watching how AI evolves.

Do these frothy rounds in AI startups make sense?

With an exceptional team, a pre-revenue bet can work.

For example, the Journal article mentions Essential AI, a startup founded by two of the leading AI researchers at Google. They raised recently at a $50 million valuation.

Making a bet on incredible founders at a $10 million, $25 million, or maybe even $50 million valuation can work. But when the numbers stretch into the nine figures, it’s very hard to make money.

With AI, we risk repeating all the mistakes we made in crypto.

$100 million seed rounds with no product or paying customers just don’t work. When the entry price is that high, there aren’t enough big wins to cover all our losses.

I want defensible businesses with real customers and revenue. And the entry price has to make sense.

I think AI will change the world. But as an investor, I’m going to be patient.

How are you playing the AI boom? Leave a comment and let us know.

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More on tech:

AI: Capital Bonfire?

Right Founder. Wrong Market.

From $10 Billion to Zero — Late Stage Ice Age

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