As AI startups and their valuations mushroom, some venture investors are choosing to keep their powder dry

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AI is emerging as an outlier and beacon of hope in venture capital, even as overall funding dries up.

Consider some recent examples: AI-powered wearable devices company Humane , backed by investors including OpenAI chief Sam Altman; AI voice startup Eleven Labs; generative AI startup Cohere ; and AI-powered chatbot startup Character.AI . Each has raised money within the past few months.

But even as some investors charge ahead to capitalize on the AI gold rush, others are holding back due to the sheer speed and scale with which the industry is progressing – throwing all conventions out the window , The Wall Street Journal reported this week.

“I have no idea how to play AI right now – I see what seems like the coolest generative AI tool ever. Then, a week later, I see another tool that blows that away,” wrote Francis Santora , an angel investor and venture partner at Seedscout . “So for now, I’m sitting back and watching how AI evolves.”

A mad dash

Santora is part of a growing chorus of investors cautioning against what they say has become a freewheeling ecosystem – with new startups cropping up every day, and investors competing to back them.

Since the launch of ChatGPT in November, a cottage industry of AI startups has mushroomed and defied the broader slump in tech. The generative AI space is particularly hot. Not a week – or rather day – goes by without someone unveiling a “generative” artificial intelligence startup tackling everything from healthcare imagery to translation. It harks back to the days when every other startup was trying to build “the Uber of X.”

“It’s really hard to deploy capital in an environment like that,” Santora told LinkedIn News. “I could make an investment today, and it could be obsolete by next week.”

Additionally, the competition to back them has become so intense that venture firms are even willing to put their money behind companies without so much as a business plan, the Journal noted, which was echoed by the investors LinkedIn News spoke with.

That, in turn, is causing valuations to skyrocket. Startups raising seed rounds are pushing for valuations of tens of millions of dollars. Some companies are raising back-to-back rounds of funding.

For example, LangChain , an open-sourced library for software developer tools with no revenue, recently closed a $10 million round at a $50 million valuation, the Journal reported. A few weeks later, Sequoia Capital injected more funding and quadrupled the valuation to around $200 million.

“Making a bet on incredible founders at $10 million, $25 million, or maybe even $50 million valuation can work,” said Santora. “But when the numbers stretch into the nine figures, it’s very hard to make money.”

It’s harder for AI startups to stand out and compete

Many, including Bill Gates, the co-founder of LinkedIn parent Microsoft , have compared the advent of AI to the rise of the personal computer, the mobile phone, and cloud computing in terms of how disruptive it is as a technology.

But while startups were able to ride those waves, the same cannot be said for certain with AI.

“The companies that figured out Google SEO got a lot of traffic, the companies that figured out rankings on the App Store had a six-to-18 month advantage to get new users to compete with the incumbents,” said Tomasz Tunguz , general partner at Theory Ventures .?

He continued: “AI is not that way, because startups actually have negative time to launch. Microsoft, Google and all the big companies have adopted AI technologies faster than a lot of startups. So they're actually behind.”

These startups are also at risk of eventually being crushed by Big Tech, said Pegah Ebrahimi , co-founder and managing partner at FPV Ventures .

“This wave of AI is exciting and moving way faster than the mobile wave – you have a lot of focus on the application layer since folks are excited about use cases,” she said. “The main question is will a large company want to use them once they are running their own AI using the same underlying easy-to-embed technologies the AI startups are using.”

For Tunguz, another challenge for AI startups is that there's no net new distribution opportunity. They can add AI features to their products, but there isn’t an ecosystem like mobile app stores that guarantees they can get more users.

“You could have an AI feature, but that's not enough to differentiate, it's not enough to grow,” he said. “It's a necessary but insufficient addition to your roadmap. What is the distribution advantage? It's completely unclear.”

While investors said they were bullish on AI overall, they would hang up their boots in the interim until these issues are ironed out.

“I think AI will change the world,” said Santora. “But as an investor, I’m going to be patient.”

This Week in AI

Here’s where we bring you up-to-speed with the latest advancements from the world of AI.

• First and foremost, 谷歌 announced a slew of new AI updates at Google I/O, its annual developer conference this week. Here are the highlights:

1. The company said it is ramping up its core search business with a heavy dose of artificial intelligence, adding generative AI features that will give users more information and context during web searches.
2. Google also announced that its chatbot Bard will get new features and become available for everyone as it transitions to its new large language model, PaLM 2.
3. Lastly, it announced its first foldable smartphone , the $1,799 Pixel Fold, which is expected to challenge the similarly priced Samsung Galaxy Z Fold 4.

• IBM is also getting into the AI race. More than a decade after debuting Watson — a literal question-answering machine designed to beat humans at “Jeopardy” — IBM has brought back the brand in the form of Watsonx , a platform that aims to help companies create and integrate custom AI capabilities into their operations.
• Hugging Face launched the Transformers Agent this week, which is an open-source coding language model that can generate other Hugging Face models for multimodal tasks. By using its tools to develop new ones, the code is essentially accessible to others, with the idea being to increase its power with every use.?
• Scale AI has unveiled Scale Donovan and Scale EGP, two AI platforms tailored for governments and enterprises. While Scale Donovan acts as an AI copilot for defense, Scale EGP provides a full-stack solution for enterprises and government agencies to leverage LLMs without disclosing data to third-party AI companies – and is already being used by Fox Corporation and Koch in their operations.
• Credo AI has also launched a new product called GenAI Guardrails , a set of governance capabilities designed to help organizations understand and mitigate the risks of generative AI.?
• Unlike Geoffrey Hinton, Professor Jürgen Schmidhuber , the man behind technology that led to 苹果 ’s Siri and 谷歌 Translate, says AI's rise is inevitable and not to be feared . A controversial figure who some consider the "father of AI," Schmidhuber said that development can’t be expected to stop in the midst of an AI arms race.?
• It’s not just tech giants, restaurant chains are jumping on AI too. The Wendy's Company ’s has debuted a chatbot powered by artificial intelligence to take drive-thru orders. The company said the system can understand speech and answer frequently asked questions, and is intended to eliminate miscommunication and cut down on mistakes.

TechTok?

Catch up on the tech headlines you may have missed this week and what our members are saying about them on LinkedIn.

• With stock still comprising a significant piece of pay packages and tech shares yet to return to 2021 heights , tech workers are adjusting their expectations.?
• Twitter is planning to launch an encrypted direct messaging feature , CEO Elon Musk said in a tweet , which brings it into competition with messaging apps such as WhatsApp and Telegram Messenger , and comes after Musk posted in November that he hopes DMs can “superset Signal .” The platform will also begin purging accounts that have been inactive for years, adding a warning that follower counts could drop.
• 亚马逊 will pay some customers $10 to pick up their orders at locations such as Whole Foods Market , Amazon Fresh or Kohl's stores, versus shipping them to a home address. The move is an effort to cut costs on deliveries and returns.
• Luxury EV startup Lucid Motors reported a $779.5 million net loss , a much steeper drop-off compared to its $81.3 million net loss in the first quarter of 2022. The company tempered its swelling losses by saying it has enough cash to sustain operations into 2024.
• Slowing Switch sales put a damper on Nintendo 's profit and revenue over its full 2023 fiscal year. The video-game giant reported a 5.5% dip in revenue, while sales of its flagship Switch console dropped 22%, largely due to "shortages of semiconductors and other components" that affected production into late summer.

Movers and Shakers

Here’s keeping tabs on key executives on the move and other big pivots in the tech industry. Please send me personnel moves within emerging tech.

• The Ai2 has raised $30 million for its second incubator fund backed by high-flying venture firms including Madrona , Sequoia Capital , Khosla Ventures , Evergreen Gavekal Ventures and IRONGREY .
• Boston-based Glasswing Ventures has promoted Kleida Martiro to partner.
• Calendly has hired former Salesforce exec Stephen Hsu as chief product officer.
• Twitter 's top policy official in the U.S. and Canada, Lauren Culbertson Grieco , is leaving the company .
• Intuit has added LinkedIn CEO Ryan Roslansky and Zoom CEO Eric Yuan to its board of directors.
• Nonprofit All Raise , which supports women founders and funders, has named its interim CEO Paige Hendrix Bukner as full-time CEO.
• Atlassian has hired Peter Lenke, CFA , formerly director of corporate development and strategy at Twitter, as head of its VC arm.

ICYMI

Here are other top stories of the week from beyond LinkedIn in the broader world of tech.

• 谷歌 retained information on visits to abortion clinics, medical centers and fertility specialists despite the company’s promises to delete such sensitive data, according to an investigation by The Washington Post .
• Former Uber security chief Joe Sullivan was sentenced to three years' probation and 200 hours of community service for covering up a 2016 cyberattack and obstructing a federal investigation.

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