New AI investment bubble is already inflating the VC market

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The numbers haven’t been adding up quite right for some time now, and VC funds are facing the challenge of returning to being, as they once were, operations of good profitability for investors and managers.

At this year’s SXSW, this was the theme of the panel Rethinking the Math: Right Sizing the Venture Capital Model, hosted by the friendly anchor and debater, investor Batual Joffrey, alongside the poised but experienced and successful Bryce Roberts, Founding and Managing Partner of the Indie fund, from Salt Lake City.

I remember, as soon as I definitively decided to turn the key of my life and become an investor and entrepreneur, with Pipeline Capital as my mothership, when I started participating in events like the one described above, where the discussion topic was exactly the same, I was shocked to see that industry figures pointed to a success rate of about 5%. I mean, only 5% of companies managed to be successful in the sector.

In any other sector, this indicator should say one and only one thing: inefficiency, because it certainly leaves a lot out and undoubtedly leaves investment profitability on the table.

But the mood was exactly the opposite. The system was proud of it. If it was like this, it was because the funnel was rigorous in pursuit of the greatest gain and the highest return to managers and investors.

The quest was simple: find, nurture, and grow a Unicorn. In other words, anything outside this univocal and monotonous logic, besides being financially unoriginal, was cold. Something for those who are not competent and don’t know how to invest.

I always thought this was a big nonsense because there’s a lot of money to be made outside this little fenced area full of pink horned animals with frilly horns and only driven by high double-digit multiples.

Well, that was exactly the conclusion of the panel here. Obvious. The system collapsed. There are still a bunch of zombie funds operating in the market, but they’re going sideways, swapping lunch for dinner. And now begins the inevitable redirection, repositioning, and re-conceptualization of VC mathematics.

The overwhelming majority of investments in 2022, as Joffrey showed us, went to startups that may not necessarily become unicorns. A significant portion also shifted to being invested less in planetary transformation ventures and more in ventures and startups with less disruptive, and hopefully, safer theses.

At the moment, investment volumes and startups receiving funding are way below previous years. They are expected to pick up again in 2024 (we’ll still need a bit of patience) to return to 2020 levels by the end of the year, at least. (2021 was the boom that led to the bubble burst in the following year, with extremely high investment volumes and stratospheric valuations).

In this scenario, however, a new bubble is already forming: the AI bubble. One out of every three dollars in the VC market is already being invested in AI. Like, whatever it is, bring it on.

Since neither scientists, researchers, developers, entrepreneurs, nor investors can now know what will or won’t work in AI, it’s already an uncontrolled gold rush.

Bubble again. Now, with exponential explosion capacity.

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