Can crypto alleviate AI's computing crunch? Not so fast.
Plus: LPs flock to digital infrastructure funds, and the status of VC valuations underneath AI inflation
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Generative AI took the venture landscape by storm. Now, it may be dragging down startups and firms as costs soar for computing power. Investors are hitting the breaks at the earliest stages, worried about AI’s pathway to profitability while sounding the alarm over the sustainability of sky-high valuations.
But some investors think they've found the solution: bring Web3 and crypto to AI. Decentralized GPU cloud startups, acting like rental marketplaces for unused computing power, are garnering attention and capital.
Proponents insist that by bringing decentralized networks to AI, costs will come down, access will be democratized and data integrity will be improved.
“There’s a certain pipeline that creates AI products, owned by a few Big Tech companies exercising overwhelming centralized control,” said CoinFund CEO and founder Jake Brukhman “Let’s open up the pipeline. If you want to defeat Google and OpenAI, we have to build these networks.”
But amid the growing interest at the intersection of crypto and AI, some criticize the mashup as a blatant attempt to cash in on hype, writes VC reporter Jacob Robbins.
When it comes to offering AI computing power, Castle Island Ventures general partner Nic Carter, who is an angel investor in red-hot GPU cloud computing startup CoreWeave, says that the needed resources to run and train AI models are too immense and that he doesn’t think these startups can function at any useful level.
Carter’s firm hasn’t backed any crypto AI startups, though it has invested in Monad Labs, an ethereum blockchain developer. And despite the cynicism, Carter said that his views don’t come from a lack of trying. He’s actively searching for lucrative crypto AI deals.
“There’s still an abundance of deals to be done in crypto, and I want AI exposure,” he said. “But I want it directly, not through the crypto interface.”
LPs find digital infrastructure to be latest hot-ticket item
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Limited partners have allocated more and more capital to digital infrastructure strategies. Over the past decade, reports PitchBook's Jessica Hamlin, allocators poured capital into infrastructure and real estate funds investing in digital infrastructure, capitalizing on the sector's historical outperformance. In fact, from 2014 to 2023, private funds with either investments in digital infrastructure or a specified mandate to invest in the sector brought in a collective $800 billion in capital commitments.
AI is inflating VC startup valuations, while extended slowdown forces other sectors back to market
AI is artificially inflating valuation numbers across VC, with the sector capturing nearly 50% of total deal value in Q2. But flat and down rounds are at a decade high and valuation step-ups between rounds have softened, according to our Q2 2024 US VC Valuations Report.
On the public markets side, price/sales ratios are stagnating, and recently listed SaaS and consumer tech stocks haven't performed as well as expected. So as more startups that last raised during the pandemic highs come back to market, investors shouldn't bet on seeing a windfall anytime soon.