Published May 16, 2023, 12:20 a.m. by Liam Bradley
The technology sector is in a constant state of change and evolution. So it's no surprise that startups focused on artificial intelligence (AI) are attracting a lot of attention from venture capitalists (vcs).
However, some experts are cautioning that AI startups may be a risky investment for vcs.
One of the main concerns is that many AI startups are focused on developing narrow applications that may not have a large market. For example, a startup might develop an AI system that can help identify plagiarism in academic papers.
While this might be a valuable tool for universities, the potential market is relatively small. In contrast, a startup developing an AI system that can be used by businesses to automate customer service or sales tasks would have a much larger potential market.
Another concern is that AI startups often require significant amounts of data to train their systems. This can be a challenge for startups that don't have access to large data sets.
Finally, there is the risk that AI systems may not perform as well as expected. This could lead to disappointed customers and decreased sales.
Despite these risks, vcs continue to invest in AI startups. This is because the potential rewards of a successful AI startup are very high. A successful AI startup could revolutionize an industry and generate billions of dollars in revenue.
So while AI startups may be a risky investment, they also have the potential to be very lucrative.
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[Music]
welcome to Tech news briefing for
Tuesday May 9th I'm Zoe Thomas for The
Wall Street Journal
investing in Silicon Valley startups has
slowed this year amid widespread
uncertainty about the economy but one
sector is Bucking that Trend artificial
intelligence startups Venture
capitalists have been pouring money into
AI companies regardless of their plans
or lack of plans forever turning a
profit or even getting a product to
customers with me to talk about this is
our startups reporter Berber gin Berber
can you start by telling us about one of
the companies that's been attracting
investment despite maybe not having a
fleshed out business plan yes so there's
a company called essential AI it was
founded by two former Google AI
researchers
these two Founders were at another
startup
until the end of last year
and told investors they were thinking of
creating a new company before that
company even had a name or a business
plan or a way to generate Revenue
essentially Venture capitalists were
hounding these two Founders trying to
Lodge and early investment in their
company and they've since raised a few
million dollars from BC firms including
Thrive Capital which is run by Josh
Kushner according to people familiar
with their plans they're still sketching
out a definitive business strategy but
our understanding is that
the product they sort of settled on is
creating a service that can help
startups use multiple different AI
models more easily than just using one
model for example but when they're
raising money investors essentially
weren't completely sure what they were
going to do and I think that just sort
of shows the interest and the frenzy in
Silicon Valley to basically just get a
piece of what people think will be the
next sort of big Tech Revolution so
one company but overall how much money
is predicted to go into the AI space
this year so This research firm
pitchbook which tracks data for the
whole industry they predict that
investment in generative AI companies
alone so the companies that are using
and building models that can generate
intelligent text and word responses that
it'll be several times last year's level
of 4.5 billion dollars and if you talk
to venture capitalists they're quite in
line with that estimate and are
predicting a basically a huge surge in
new investment into these companies
despite the current downturn what's
driving that it started with the release
of Chachi BT last fall it really opened
the potential that VC saw in generative
AI as an investment category more
generally I think VC started realizing
that there could be specific generative
AI models that could be used in
healthcare in social media applications
and even fintech and financial payment
services applications
and they also realized that there could
be also competitors to open AI who are
building their own language models and
are racing to win that part of the
market as well I mean if there's so much
demand to invest in these companies
what's the competition like then amongst
investors to get in and find the right
company
I think you sort of see a return to
a bull market mentality where VCS are
doing anything and everything to try and
get in front of Founders and show that
they're really excited by AI there's one
Venture firm we reported on called nfx
they re-outfitted their office in Hayes
Valley which is where a lot of the a
activity is happening right now they
created a red walled Speakeasy and they
turned their garage into an event space
those are the types of things that VCS
do when they're trying to get in front
of Founders and show that they're the
right people to partner with even in the
investment terms you're seeing
valuations that are sort of like 2021
valuations like really high prices that
VCS are paying for companies that don't
have a set business plan you see rounds
coming together in a matter of weeks you
know due diligence not being as thorough
as you would normally expect so it is
kind of a return to the bull American
mentality that a lot of VCS actually
have learned about is there any concern
then that they are rushing into some of
these deals that could maybe just turn
out to be hype I think one thing that's
important to to note is that there
hasn't actually been a clear path to
success that any of these startups have
proven so I think there are a lot of
question marks around who is going to
capture a lot of the value around this
technology and that's the big risk that
these VCS are taking by paying these
high prices to get into these very young
and unproven companies
all right that was our startups reporter
Berber gin thanks for joining us Berber
and that's it for today's Tech news
briefing for more Tech stories head over
to our website wsj.com I'm Zoe Thomas
for The Wall Street Journal
thanks for listening
[Music]
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