DEEP DIVE: AI Hype Is Hyper

Determining when an investment trend has run its course is more of an art than a science. While we love the productivity-enhancing possibilities that artificial intelligence (AI) offers, the AI phenomenon has many of the hallmarks of an inflating bubble. There are big bucks chasing the AI dream. New kings of industry have been crowned. And the hyperbole is flowing.

Let’s take a look at some of the warning signs we’re watching:

(1) Funds are flowing. We’ve been big fans of AI and what it can accomplish. This year alone, we’ve highlighted AI that trains autonomous cars; develops drugs, plans weddings, and tickets drivers; helps teachers develop lesson plans and grade papers; and aids Madison Avenue’s advertising pros write copy and create videos.

But at some point, too much capital can end even the best of parties. There are hundreds of small companies that have raised billions of dollars from venture capitalists hoping to discover the next ChatGPT. Investors have poured $330 billion into 26,000 AI startups over the past three years, which is two-thirds more than was spent funding 20,350 startups from 2018-20, according to an April 29 NYT article citing PitchBook data. Likewise, generative AI deals attracted $21.8 billion last year, up fivefold from 2022, according to CB Insights data in an April 29 WSJ article.

Many AI newcomers have yet to turn a profit. The NYT highlighted a number of companies that were running out of funds, including Stability AI, which has laid off employees and watched its CEO depart. Inflection AI raised more than $1.5 billion to develop a chatbot that gave emotional support to its users, but its CEO and much of his staff left for Microsoft.

Fortunately, most of these companies haven’t borrowed debt in the capital markets, so a repeat of the telecom bust is unlikely. But if AI startups run out of cash, their suppliers could find AI-related revenues dry up quickly.