When Mistral AI, a French startup, raised one of Europe’s largest-ever seed rounds of €105 million ($118 million) last month, it didn’t have a working product. However, Antoine Moyroud, a partner at Lightspeed Venture Partners, one of the startup company’s major backers, seemed unfazed.
It may seem like a large amount, he said, but the corporation needs a lot of expensive computing power to carry out its ambitious, worldwide plans, he added.
The blown-out deal is only one illustration of the maniacal frenzy surrounding the possibility for “generative” artificial intelligence, which can produce original text, graphics, and other content in response to user requests, to yield enormous returns for investors.
However, other investors and businesspeople are concerned that the fundraising craze is developing into a bubble, with cash being poured into businesses that don’t have revenue, a cutting-edge product, or sufficient expertise.
The current flood of investment in AI firms, according to Emad Mostaque, founder and CEO of Stability AI, a generative AI company that also counts Lightspeed of California among its investors, would likely result in “the biggest bubble of all time.”
Mostaque recently referred to the “dot-com” bubble in the late 1990s, when speculative bets on emerging internet companies ultimately led to significant losses for many investors, saying, “I call it the ‘dot-ai’ bubble, and it hasn’t even started yet.
Another bubble?
Venture capitalists are vying for seats on the AI rocketship, and their investment in Mistral AI is just one of many this year. According to Pitchbook data, they invested $15.2 billion in generative AI businesses worldwide in the first half of 2023.
The majority of this money comes from Microsoft (MSFT), which invested $10 billion in OpenAI, the company behind the well-known generative AI chatbot ChatGPT, in January.
The value of venture capital investments in generative AI was boosted by about 58% in comparison to the same period in 2022, even with Microsoft’s big deal excluded.
Companies using generative AI are receiving billions from venture capitalists.
In comparison to the same period last year, VCs invested nearly five times as much in generative AI companies in the first half of 2023. Even after accounting for Microsoft’s $10 billion investment announced in January, venture capital spending has increased by roughly 58% compared to the first half of 2022.
According to Moyroud at Lightspeed, the public release of ChatGPT in November was the reason for the current hype. He has noticed that more companies are mentioning generative AI in their funding pitches, but he treats some of those pitches with a grain of salt.
It takes time to weed out the “substance” behind some founders’ claims, but we’ve [seen] some folks who haven’t necessarily spent a lot of experience in the business and are adding, if you could call it that, a little generative AI sparkle to their pitches, Moyroud added.
He leaves Mistral AI off of that list. The startup’s €105 million in revenue was funded in part by Moyroud’s venture capital business, which paid a premium for the three founders’ “unmatched” expertise: They had previously worked with “large language models,” a sort of generative AI; two of them at Meta, the parent company of Facebook, and one at Google’s DeepMind.
Only a small portion of the world’s population—around 80 to 100 people—has expertise training large language models at scale, according to Moyroud.
Big-bucks private investors aren’t the only ones attempting to profit from the AI boom: Since the start of the year, investment flows into the top five exchange-traded funds (ETFs) worldwide focusing on artificial intelligence have increased by an average of 35%. After a rough 2022, stocks on the heavily weighted Nasdaq index have increased by about 42%, outperforming the gains of the larger S&P 500 index, which have increased by less than 19%.
The sixth firm in the world to reach a market capitalization of $1 trillion was Nvidia in May. Nvidia is a US corporation that manufactures the sophisticated microchips needed to fuel generative AI. Since the beginning of the year, its stock has increased by 207%.
However, throughout the previous 12 months, Nvidia’s stock has also fluctuated on a price-to-earnings ratio of 237, which is a gauge of whether a share is overvalued or undervalued. A stock is more likely to be overvalued the higher the ratio. Companies on the S&P 500 traded on an average ratio of 24 during the same time period, for comparison.
While C3.ai, an AI software business whose stock has increased by almost 240% this year, is not profitable, it is not anticipated that it will be either this year or next. Nvidia, on the other hand, is profitable.
According to investors interviewed, the situation is eerily similar to the dot-com boom. However, every bubble must eventually burst.
The value of the Nasdaq more than doubled in 1999 alone as investors poured money into dot-com businesses starting in late 1998. But according to Goldman Sachs, the majority of startups never made any money, despite lofty expectations and high prices. Between its high in March 2000 and late September 2002, the value of stocks on the Nasdaq plummeted by 81%. The bubble had successfully burst.
The current excitement, according to Mike Reynolds, vice president of investment strategy at Glenmede, a US wealth management company, is similar to that of the [90s] tech bubble, when many businesses were still in the early stages of turning a profit but investors were willing to bid [their stock price] steadily higher.
He continued, We have yet to really see [the AI hype] translate into actual, fundamental results.
Picking a winner
Reynolds said it will be “very difficult” for investors to determine whether they are investing in the AI equivalent of the upcoming Amazon (AMZN) or Google (GOOGL). According to a Glenmede research, only Microsoft (MSFT) and Cisco (CSCO) were among the top 10 tech and communications companies in March 2000, at the height of the dot-com bubble, among the ten most valued tech and communications stocks now.
According to Reynolds, it’s not always clear who will benefit the most in the long run from innovative disruption.
A corporation might, he continued, simply add the word ‘dot-com’ to the end of their company name, and their stock price [would] go up 10% the following day.
A Toronto-based VC firm with a focus on AI, Radical Ventures, co-founder and managing partner Jordan Jacobs has noticed a similar impulse among today’s startup innovators.
According to Jacobs, merely purchasing a “dot-ai” domain and claiming to be an AI company doesn’t actually qualify you as such. Determining who is real and who is not is one of our responsibilities as investors.
In the past 13 years, Jacobs has launched two AI businesses. He believes there is a “complete lack of appreciation” for the technology’s potential future value.
Within the next ten years, he asserts, AI will be integrated into or totally replace every piece of software, creating “trillions of dollars of economic value. According to him, the technology is also making strides in the areas of medication development and climate change modelling.
Generalist investors suddenly became aware of AI’s incredible potential after ChatGPT was released and Microsoft made a massive investment in OpenAI. It was also the first time that everyone got to interact with the technology.
He claimed that it was a little bit like magic.
