March 28, 2024

Are AI Startups a Risky Investment for VCs? | Tech News Briefing | WSJ



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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