With valuations down, this year’s investments should be some of the best ever. But many VC’s are riding AI startups right off a cliff.
Total venture capital investment is down almost 90% from the peak, according to Carta.
Late stage funding has practically ceased to exist. Even seed is down almost 70%.
With valuations and competition down, investments done this year should yield amazing returns.
But the few rounds actually getting done tend to look the same: AI companies with little or no revenue raising tens of millions.
The valuations are often over $100 million. Rewind AI even notched a $350 million valuation.
Fred Wilson at USV has proven that seed rounds at $100 million cannot work. There aren’t enough big IPOs in the world to make money at that price.
Meanwhile, companies without AI at the core are struggling to raise capital.
They have real businesses and revenues. They’re raising at great prices.
But they’re just not cool anymore.
Let’s take a company like Uber. Uber gets you a ride somewhere. Where does generative AI fit into that?
Nowhere I can see. But it’s still a great business.
The next Uber is out there now. But VC’s aren’t looking for it.
Worse yet, many of these buzzy AI companies have minimal defensibility. If you can spin up a service quickly with an API call to OpenAI, so can someone else.
Moreover, AI is evolving so fast that today’s amazing tech is quickly upstaged tomorrow. Deploying tens of millions in that environment is treacherous.
VC funds took a drubbing in 2022. This year, they have a chance to redeem themselves by investing in great businesses at reasonable prices.
Instead, they’re running toward a new hype cycle. And their investors will pay the price.
I think generative AI is a fantastic technology. I use it every day.
But the normal rules of investing still apply. You can’t make money investing in businesses with no paying customers at 9 digit valuations.
So how can you make money?
By investing in businesses with real customers and revenue at reasonable prices. At seed, that’s around $8-20 million.
In a way, I’m happy to see VC funds stampede toward AI. That means minimal competition and low prices for the investments I want to make.
Will AI investments work? Leave a comment and let us know what you think!
Have a great holiday weekend everyone!
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