Venture capitalists are in the business of predicting the next big thing, even if they get burned in the process. While everyone piled onto crypto in 2021 — and many remain bullish about its future despite multiple failures this year — 2022 saw the rise of generative AI.
But as is the case with any transformative new tech, hype is sure to accompany growing adoption, and generative AI has garnered so much attention and money that many VCs already feel the budding sector will be the next bubble.
TechCrunch recently surveyed more than 35 investors working in different geographies, investment stages and sectors about how they were feeling about next year. One of our questions sought their prediction of where the next bubble would be, and almost half of those surveyed mentioned generative AI.
While several investors said they were bullish on the new tech overall, they also admitted that the sector was likely to get lost in its own hype.
Don Butler, managing director at Thomvest Ventures, feels the bubble is already here. “We believe that the applicability of AI to so many use cases will lead to a very large number of startups being funded in the space, including at some eye-watering valuations, and so we think that the next big bubble is already expanding in this area,” he said.
This isn’t surprising, given how the sector has burgeoned recently as consumer tools like ChatGPT, DALL-E and Lensa AI soared in popularity both in and outside the tech community.
For investors like Spencer Greene, a general partner at TSVC, the technology will be good in the long run, but what we are seeing now isn’t likely to last. “The underlying core technology is valuable, but most of the application-layer companies proposing to exploit it at this stage are not,” Greene said. “Remember AltaVista, Myspace, etc. — first mover ain’t everything.”
While Harley Miller, founder and managing partner at Left Lane Capital, allows for the possibility that innovation in generative AI will produce some great companies, he thinks the tech is currently being applied in areas that won’t work or will likely have consequences for implementing it too early.
“We are starting to see applications of the technology in areas like mental health that we don’t think have good enough efficacy relative to human offerings,” he said. “That said, generative AI shows a lot of promise and we are excited about it for the right applications, but we think there will be a lot of hype applying this to categories that are not quite right.”
Miller described the situation as similar to what happened with NFTs and blockchain. The tech’s allure prompted investors — looking to make sure they didn’t miss the trend — to pour money into numerous companies regardless of having any real use cases.
He isn’t the only one to make that connection either. Several other investors said the tech’s growth has reminded them too much of crypto: Everyone is piling on faster than they should be.
Tyler Griffin, a managing partner at Restive Ventures, drew parallels with how blockchain was treated when the hype was building. “It has echoes of the early days of crypto: Genuine excitement about a new, fascinating technology, coupled with outrageous predictions of transformative applications that betray a lack of understanding by (often non-technical) people about what’s really going on,” he said.
Some, like Sam Clayman, a partner at Asymmetric Capital Partners, said it reminded them of the dot-com bubble, too. “It can be both true that enormous companies will eventually be built in the space and that aggregate returns on capital for the industry will prove dreadful,” he added.
But some growing pains are hard to avoid, and many investors are allowing for that since they also recognize the transformational power of the tech.
Jon Lehr, the co-founder and general partner at Work-Bench, said that he could see many opportunities emerge down the road in the category, especially relating to infrastructure for new use cases. “As the technology matures and more use cases are better understood, there will be new paradigms to invest in based on this shift, in addition to picks-and-shovels type businesses (for instance, guard rails for enterprise adoption),” he said.
Despite recognizing the hype, some investors are optimistic the sector will end up being worth the buzz. Ben Miller, the CEO of Fundrise, said, “It has passed the inflection point of hype and will see more funding and growth than any other sector this decade,” he said.
“Although the hype will be stratospheric, it will birth the greatest productivity boom in American history since the invention of electricity.”