We’ve Seen This Before: Investors Take To The Next Shiny Toy

The venture market is still recoiling from its highs of 2021, but that hasn’t stopped investors from pouring billions into the next big thing — artificial intelligence.

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Investors talk about doing more due diligence now to avoid something like FTX happening again, and getting away from the FOMO environment that ruled venture not that very long ago.

But let’s take a look at what’s going on in AI.

Big money

Just last month, Microsoft confirmed it has agreed to a “multiyear, multibillion-dollar investment” into OpenAI, the startup behind the artificial intelligence tools ChatGPT and DALL-E for a reported $10 billion. The following week, news broke that San Francisco-based AI startup and rival to ChatGPT Anthropic is raising a $300 million round from Google — bringing the company’s total valuation to $5 billion, The New York Times reported.

Also just last week, Reuters reported Toronto-based Cohere, an AI platform that competes with OpenAI, is talking to investors to raise hundreds of millions of dollars in a funding round that could value the startup at more than $6 billion.

Others such as Asimov and Metagenomi — which use AI in biotech — and AI-based language translator DeepL all raised rounds of more than $100 million recently.

Those are big numbers — especially in a market that has slowed remarkably in the last 12 months, and the AI craze shows no signs of slowing.

Does any of this look familiar? Because it should.

At this exact time last year — just as the market was showing signs of strain — Web3 and crypto were having their seminal moment.

The first quarter of 2022 saw 29 rounds of $100 million go to startups in the sectors. Some of the biggest hits include:

Brooklyn-based decentralized protocols software startup ConsenSys raised a $450 million round at a valuation of over $7 billion.
Miami-based Yuga Labs — the startup behind the Bored Ape Yacht Club NFT collection — closed a $450 million “seed” round led by a16z crypto.
India-based Polygon Technology, a scaling platform for the ethereum blockchain, closed a $450 million round led by Sequoia Capital India at a reported $13 billion valuation.
And, of course, both FTX and FTX US raised $400 million rounds at a $32 billion and $8 billion valuation, respectively.

AI: We’ve been here before

This happens all the time in venture. A few big rounds lead to more, even bigger rounds, and all of a sudden investors can’t stop writing checks as quickly as their hands can move.

Just recently we saw big venture runs in areas like HR (when companies were actually hiring, not laying off) and logistics technologies. In the past “big data,” “machine learning” and a variety of different cybersecurity acronyms all caught the attention — and a lot of money — of VCs only to flame out not long after.

Just as OpenAI’s artificial intelligence tools ChatGPT and DALL-E took off, the skeptic would wonder: Why has funding in AI exploded just in the past few months, and how will VCs see the multiples they want from an exit at these valuations? Where was this excitement, say, just 12 months ago? Was the technology not developed enough then, but it is now?

That seems convenient.

Private vs. public investors

But skepticism usually is in short supply in the private market, unlike its public brethren. Last week, while investors were jumping in with both feet in the private market, we may have seen just how unsure and uneasy public investors feel about the new AI craze.

Alphabet — the parent company of Google — lost $100 billion in market value after its artificial intelligence tool, Bard, incorrectly answered “What new discoveries from the James Webb Space Telescope can I tell my 9 year old about?”

Not a great moment for Google’s AI team, for sure, but it also shows the extremely fragile confidence public investors have in what is a relatively new tech tool — at least in its new use cases.

That isn’t to say AI doesn’t have real and significant tailwinds. We’ve talked about those before, including the democratization of technology and the simple fact that computer technology advancements have made AI better and more efficient.

Then again, one can argue that decentralized finance and Web3 also are not going anywhere despite the battering startup valuation have taken in that sector.

Nevertheless, every startup is now using “AI” in its description — hey, you’d be stupid not to, as one AI unicorn founder told me recently. And every investor and firm wants in on the next hot deal in AI, even though not all of these “AI” startups are clearly differentiated and the enormous valuation spikes will make it difficult to get the returns VCs need for successful exits.

Maybe it’ll all turn out well, but recent history of these types of run-ups by VCs suggests it may not.

Illustration: Dom Guzman