VC Valuations and Generative AI – Remember That the Only Time is Now

Phone with ChatGPT on screen

It’s not very often that truly disruptive technology comes along.  But when it does, the investment community is almost always fast to jump on the opportunities surrounding that technology and drive as many dollars toward its expansion as possible.  Today, Generative AI is the belle of the ball, and Venture Capitalists, and large companies alike are throwing every dollar they can at companies that claim to be using and developing the technology.  

One quick item of note if you’ll allow us to “nerd out” for a second….not all Artificial Intelligence is the same.  Many of the fears of AI overtaking humans comes from a technology called General Artificial Intelligence.  That is true, human-like ability to think and it is not what we have come to know from products like ChatGPT.  General AI is arguably terrifying as every time someone tinkers, the computers seem to find humans dispensable in short order and the computers must be unplugged.  Generative AI on the other hand, uses only existing data to help develop new ideas.  ChatGPT and Google’s Bard are examples of this and they’re not nearly as scary given the limit of existing information.  It would clearly be a lot easier to understand if the names weren’t so similar.  

Anyway, back to the investment world.  While the rest of the world is largely shut off to fresh growth capital, VCs will throw money at everything that even smells like it might be AI.  The obvious result is a bifurcation in valuations between the haves and the have nots and entrepreneurs have definitely taken notice.  So what does that mean?  It means that strategic buyers are getting tired of every pitch indicating an attachment to AI.  Anecdotally, we’ve heard local executives complaining that often times, the “AI” is no more than an Excel spreadsheet with a macro in it.  But at the same time, it’s exciting when something that can change the world shows up, and no one wants to be the idiot that missed the next big thing.  Venture capitalists, however, can see the world in a different light than a strategic buyer might.  When they make an investment, they do not intend to run the company longer term.  VCs infuse capital and offer management guidance before ultimately flipping their investment with the hopes of huge profits.  That means that they need to invest in the next big thing for as long as it is the next big thing and get out before there’s another next big thing.  

As we see it, we’re just seeing the tip of the iceberg for this technology.  Valuations will seem completely crazy for the foreseeable future and there is plenty of room to run as we find new applications.  But investors should be careful to make sure they’ve got the real article and not an Excel macro.  Perhaps more importantly, don’t let the excitement over Generative AI overshadow excitingly low valuations in other technologies. 

Source: Pitchbook


Subscribe to Wind in the Willows and receive relevant and curated information about a broad set of markets, indicators, and global economy that might affect the value of your investments,

Leave a Reply