In a way, I get it. Founders need to do what they can to raise money to pursue their startups’ vision, so I can’t blame them for trying. But I couldn’t help but think just how big this AI bubble has gotten so quickly.
It’s not the first, nor will it be the last, trend in tech. There was, and is: big data, blockchain, streaming media, social media, VR, cloud computing, machine learning, etc.
The list goes on and on. And there are many great companies that arose from every trend. And, of course, some that didn’t. But what’s astounding to me is just how quickly AI boomed. Maybe it’s because we’ve been in one of the driest spells in startup history — both on the funding and IPO sides — and then, suddenly, everybody and everything is AI.
After the slowdown in 2022, investors touted that the valuations of the previous years were gone. Startups would have to start getting back to fundamentals. The age of raising at 50x+ revenue is over. Everyone except for….AI startups.
VCs are flocking to find that next hot AI startup and have no problem paying a premium. Entrepreneurs have responded accordingly and it feels that every new startup raising is some form of an “AI company.” For some, these massive funding rounds and valuations may be a bit triggering. We just went through a massive tech bubble burst and many of us in the startup community are still recovering.
Perhaps that’s the most shocking part about this. Post-bubble burst, the media was rife with stories about how VCs had learned their FOMO lessons that fueled 2020 and 2021’s astronomical — and unsustainable — valuations.
At the same time, the advancement of AI has been mindblowing. I’d imagine most of your jaws dropped the first time you tried one of the many generative AI applications. The hype around ChatGPT — which we could argue was a bit much — was still a major advancement worthy of its reception. Much more so, than say, the Segway (which was supposed to save humanity) or Juicero, which is still the poster child for Silicon Valley stupidity.
It’s not an exaggeration that the latest AI advancements will change the way we work and our overall lives. Just imagine how long this image below would’ve taken an artist to create on Illustrator.
(Yes, that’s Barbie and Ken sitting for a portrait in a Wes Anderson-stylized reality from DALL·E).
I know some of you are a bit confused. I just called AI hype a bubble but also touted that it’s a game changing technology that’s going to change how we live. But both are true.
A lot of folks, primarily those outside of our world, view tech bubbles as more of a fad similar to fashion trends. The fad gets started, everyone starts wearing or using that fad, then it dies and disappears.
But tech does not operate like a fashion fad. Tech bubbles are different. An emergent technology comes along, people get excited and want to build startups that utilize or provide that technology, and VCs flock to fund them. Eventually, the bubble bursts and most of those startups fail. And of course, the critics come.
The difference between a fashion fad and tech bubble is that a lot gets built rapidly during these bubbles. Real companies and tech advancements that improve our day-to-day lives.The reality is that by playing the numbers game, almost all startups fail so, in a way, all startups operate in a bubble. While no one wants to be part of a bubble that bursts, it’s just part of the tech and startup cycle.
Yes, we probably should have all been a bit more skeptical of the media coverage that things were going to change with how investors funded startups. Then again, I wrote just last year about Adam Newumann — the controversial WeWork founder — getting the biggest check ever from a16z for a company that still no one understands.
In that sense, the rise of AI and the massive checks from VCs can be seen as a positive sign for the startup community: it’s back to business-as-usual.
There’s a saying in VC that comes up all the time: “the worst you can do on an investment is lose 1x, but by not investing, you potentially can give up 1000x or more.”
VCs are in the business of grand slams. They need a small percentage of the companies in their portfolio to grow like crazy in order to provide great returns to their limited partners. That means taking a lot of shots on emergent technology that may seem crazy at the time. If you look at it this way, it’s not a real surprise that the AI bubble exists.
In AI, just like in any other tech sector, most of these startups will fail. We are still in the early days of this new generation of AI and no one knows who the true winners will be. But I do know that there will be winners, the bubble will burst at some point, and we’ll be in another bubble again.
I’m not saying bubbles are good, but they aren’t necessarily a bad thing either. When was the last time an emergent technology didn’t cause a bubble? Just think how many social media apps were launched in the 2000s…I see you Google+. 👀
As for where we go from here… well let’s just enjoy the ride. Be grateful that we’re living in a time where things are changing rapidly for the better. Keep building and join a startup in the AI sector if you’re particularly interested in advancing this tech, but don’t do it for the wrong reasons. If you want to invest in AI, then invest in AI, but remember prices do matter, and make sure to do so responsibility and within your financial plan and means.
Things we’re digging: