How AI Startups are Turning into the Next Gold Rush
On January 24th, 1848, James W. Marshall found gold at Sutter's Mill in California.
This historic event would kick off the Gold Rush that transformed the entire economy of the Western United States.
Lured by the prospect of riches, hundreds of thousands of immigrants took up the grueling lifestyle of a miner as an opportunity to permanently change their lives.
In our society today, another gold rush may be underway with the advent of artificial technology (AI).
The tools have changed from pickaxes and tin pans to keyboards and monitor screens. However, there are some striking similarities between the 19th century Gold Rush and today's AI tech boom.
In both situations, founders, investors, and workers undertook rapid changes to seek profit via new sources of wealth.
Below are some lessons that ring true more than a century and a half later.
Lesson 1: Success requires sacrifice and investment
During the gold rush, workers flocked from across the world to participate in the chance to change their live forever.
More than 300,000 people sacrificed everything they had and moved to an unfamiliar and undeveloped land. For most workers, mining was a difficult and dirty job that required laboring intensely under the California sun.
A lesser known fact about the Gold Rush is that many of the immigrant workers committed their labor to newly-formed companies and ventures. Exactly one year after Mashall's discovery, 47 mining companies had already sprung up, investing in ships, wagons, and oxen to transport workers for the journey to California.
There are some clear parallels today with AI companies seemingly popping up by the minute.
In recent weeks alone, several companies gathered multiple-million dollar funding rounds:
One tracker identified more than 13,000 AI startups in the United States that leverage artificial intelligence as a core part of their business.
Not all that glitters will turn to gold
To many, there is a fine line between investing and speculating.
During the Gold Rush, there were dozens of others who uprooted their entire life only to dream of finding a flash in the pan for every lucky panner that quite literally struck gold.
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The mining companies attracted thousands of dollars (equivalent to millions today) in external investments, but the success rate was low for those that were able to return a profit to their investors.
While news of Marshall's discovery spread like fire to the eastern United States and even internationally, the hype of the Gold Rush ended within a few years
As with the Gold Rush, there is a good chance that the landscape of AI startups will follow a similar pattern.
One analysis concluded that AI startups received between 9% and 10% of total venture capital dollars in recent years.
Like the lucky gold panners that discovered enough gold to enrich themselves, there will certainly be a few AI companies that reach unicorn status.
There may be a few lucky companies that fall into the "right place, right time" and hit it big. A few others will benefit from being first to capitalize on the novelty of AI capabilities.
However, it's unlikely that most AI companies will be able to deliver on the lofty expectations - and funding dollars - thrown at them.
Sustainable success will require more than luck
The individuals who built legacies from the gold rush were those who applied business acumen to rapidly changing economic conditions.
Names like Levi Strauss made a fortune and established a legacy by manufacturing and selling denim pants to miners.
Henry Wells and William Fargo teamed up to establish a shipping and banking company to provide critical services to the legions of Gold Rush immigrants.
The most successful AI companies are likely going to be suppliers or service providers to other industries that identify a true market need.
Already, many startups are making strides across a range of industries such as banking, healthcare, and marketing.
How can investors know which AI startups will last in the long run?
While it's impossible to know for sure, don't get stuck buying into fool's gold.
Investors should follow a methodology with a history of proven results rather than throwing dollars at the latest hyped startup.
For instance, sticking to a plan such as Venley Capital's Three Trigger Strategy that has a defined exit strategy can maximize gains and minimize the risks for early stage startup investing.