Investors are caught between excitement over AI and a broader tech downturn that has led to falling investment in startups
Author of the article:
Financial Times
George Hammond in San Francisco
Published Mar 07, 2023 • 4 minute read
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The recent launch of “generative AI” tools such as OpenAI LLC’s ChatGPT chatbot has resulted in fresh excitement over the potential emergence of a new group of industry-defining companies. Photo by Getty Images/iStockphoto files Gordon Ritter, founder of San Francisco-based venture fund Emergence Equity Management Inc., believes that recent developments in the field of artificial intelligence represent a significant technological advance. He just cannot see a way to make money out of them.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors “Everyone has stars in their eyes about what could happen,” says Ritter, whose firm was an early investor in successful startups such as Zoom Video Communications Inc. “There’s a flow (of opinion that AI) will do everything. We’re going against that flow.”
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The skepticism reflects a tension among Silicon Valley venture capitalists, who are caught between excitement over AI and a broader tech downturn that has led to falling investment in startups over the past year.
But the recent launch of “generative AI” tools such as OpenAI LLC’s ChatGPT chatbot, capable of answering complex questions with text in natural-sounding language, has resulted in fresh excitement over the potential emergence of a new group of industry-defining companies.
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Last week, the Financial Times revealed that Andreessen Horowitz led an investment of more than US$200 million into Character.ai, valuing the chatbot-maker at about US$1 billion. Meanwhile, one-year-old startup Inflection AI Inc., founded by DeepMind Technologies Ltd.’s co-founder Mustafa Suleyman and LinkedIn Corp. creator Reid Hoffman, is in talks to raise up to US$675 million, having already raised US$225 million last year.
In January, Microsoft Corp. confirmed a “multibillion-dollar investment” in ChatGPT-maker OpenAI. People familiar with the talks previously said OpenAI was seeking US$10 billion from Microsoft at a US$29-billion valuation.
Companies are extremely overvalued and the only justifiable investment thesis is to get in incredibly early
Yet many VCs express caution, put off not only by eye-watering valuations, but also the huge amount of capital AI groups require as they build “foundation models” — machine-learning systems that require huge amounts of data and computing power to operate.
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Article content One investor said that because of the huge amount of capital and computing resources required, recent leaps in generative AI were comparable to landing on the moon: a massively impressive technical achievement, only replicable by those with nation-state level wealth.
“Companies are extremely overvalued and the only justifiable investment thesis is to get in incredibly early,” said another veteran investor. “Otherwise, you’re only buying in because of FOMO (fear of missing out).”
Microsoft’s deal with OpenAI ensures the company can access the tech giant’s Azure cloud computing platform. Earlier this month, Alphabet Inc.’s Google paid about US$300 million to take a 10-per-cent stake in Anthropic, at a time when the AI startup was buying substantial computing resources from the search company’s cloud computing division.
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Article content Enthusiasm for AI comes after many top investors, such as Sequoia Capital, have also been burnt after pouring cash into nascent cryptocurrency groups, only for cryptocurrency values to fall over the past year.
The value of deals struck by United States-based venture funds halved between the first and fourth quarters of last year, to US$41 billion from US$81 billion, according to PitchBook. Cryptocurrency deals plunged further, down more than 80 per cent over the same period.
AI’s potential has drawn in the likes of Sarah Guo, who, a year ago, led investment into the cryptocurrency sector for venture capital firm Greylock Partners, having also been an angel investor into cryptocurrency exchange FTX Trading Ltd.
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Article content FTX has since collapsed into bankruptcy, but Guo has raised more than US$100 million to invest into artificial intelligence with her new fund Conviction. She said now is a good time to invest and competition for AI deals is fierce, but admits “some of these valuations are nonsense.”
If ChatGPT is the iPhone, we’re seeing a lot of calculator apps
Christina Melas-Kyriazi
Priced out of companies building foundation models, many investors are looking instead to the applications that will be built on top of them, just as huge businesses have been built from the mobile apps that operate on mobile devices.
That has led some to bide their time until they sense the arrival of a “killer app” with clear commercial potential.
“If ChatGPT is the iPhone, we’re seeing a lot of calculator apps,” said Christina Melas-Kyriazi, a partner at Bain Capital Ventures LLC. “We’re looking for Uber.”
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Article content The buzz around generative AI has increased as consumers have been able to play with the technology, conversing with ChatGPT to write speeches, or using text-to-image programs such as Dall-E to create fantastical drawings.
As more people begin using the programs, the prevalence of errors and undesirable responses has also grown. Inaccuracies are deemed unacceptable in sensitive sectors such as health and defence, meaning a fundamentally disruptive application could be a long way off.
“AI makes interesting mistakes that humans don’t; you have to think very carefully before using that in defence,” said Yisroel Brumer, founder of venture-capital fund Red Cell Partners LLC. “The first time you enter a combat situation you will see something you’ve never seen before.”
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Article content Tesla no longer Morgan Stanley’s top U.S. automaker pick 3 factors that will hurt the Canadian dollar for years to come Stock market’s fate comes down to the next 13 trading sessions Recent progress in generative AI, he added, was “incredibly impressive and well beyond where we estimated we’d be today,” but “life and death decisions make it very difficult to delegate to a system that makes mistakes that are hard to understand and hard to predict.”
Other investors warn that those pivoting from cryptocurrency deals to AI investments may be swapping one flashy technology with few commercial applications for another.
“Sometimes the bubble moves from one place to the other, the money has to go somewhere,” said one venture-capital investor who bet big on cryptocurrency. “During these hype cycles there will be many things which are overvalued. There are many toys.”
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