Sinéad O’Sullivan is a senior researcher at Harvard Business School’s Institute for Strategy and Competitiveness.
If you want to know what the next big fat techo-financial fad is, just look at the 150 per cent jump of BuzzFeed’s stock when the listicle-monger said that “AI inspired content” would become “part of our core business”.
This is like manna from the sky for the venture capital industry, which desperately needs to find a new The Current Thing to get excited about — and, more importantly, excite
their exit strategies investors.
At the height of the market frenzy in 2021, VC firms smashed every record by exiting $730bn across nearly 1,000 unicorns, allowing venture funds to raise another $130bn of capital.
Fast forward to today, and while VC firms are sitting on nearly $300bn of dry powder, it appears that the factors that produced the past decade’s smashing returns are now absent. The tide has definitely gone out.
There are basically two investment models in venture capital. The first is the Greater Value Theory model, where a VC invests in a start-up that is able to create value through sustainable high-growth, and hence can IPO or exit through acquisition during good times or bad. The second is the Greater Fool Theory model, where a VC invests in a loss-hungry company that is able to, through a certain amount of hand-waving, convince retail investors, bigger investment firms or large corporations to facilitate an exit through IPO or acquisition.
The problem with the Greater Value Theory model is that it’s actually really hard to find and invest in high-growth start-ups that generate durable and outsized returns. The problem with the Greater Fool Theory model is that the off-ramps (retail investors and large companies) are closing.
Last year revealed that a lot of much-hyped companies were actually long-term capital sinkholes that required low rates and investor euphoria to bail out the performance of VC funds. The catastrophic performance of nearly 1,000 SPACs since 2020 has helped enlighten retail investors on the business models that start-ups were trying to scale.
For example, it is now apparent that ride-sharing models do not work. Many direct-to-consumer plays with a thick veneer of technology hype have either entered administration or are still unprofitable. It’s now especially apparent that Web3, crypto exchanges and NFTs — while a temporary Hail Mary that created many successful exits — won’t be a venture capital focus moving forward.
The last decade of easy wins in VC means that a large percentage of investors never cared much for the Greater Value Theory, and so must find a way to make Greater Fool Theory work. Enter the field of Generative AI and venture capital’s saving grace: ChatGPT.
If you’re wondering why VC-Twitter has recently changed profile pictures from monkeys with laser eyes to Picasso-like renditions of their faces, look no further. Sam Altman, founder and CEO of OpenAI has seemingly saved an entire asset class from itself through the release of its consumer-facing ChatGPT tool.
In the aftermath of the Web3 implosion, Greater Fool Theory investors were forced to generate several months of out-of-character Twitter threads about how we’re moving into a fiscally conservative era and how CEOs should responsibly cut spending to create value.
Thankfully, the world without hype did not last for long enough for said investors to consider moving to Greater Value Theory models. Phew.
Despite generative AI tools having been around for a long time, the sudden inflow of large capital and the return of Big Investors leading Big Rounds again can be attributed to the amount of shock value created through society by ChatGPT’s release.
In the same way that we once heard “every smart person I know is building in Web3”, now apparently “every smart person I know has a ChatGPT tab open”. And In the same way that Web3 and crypto exchanges were supposed to fundamentally change the way the global financial system operates, ChatGPT will disrupt everything from education to knowledge work itself.
Yet also similarly to Web3, ChatGPT has its own network of people who have worked on the technology for decades and seem to think that the tool is overhyped?
For example, Meta’s chief AI scientist Yann LeCun has (rather unsuccessfully) tried to dampen the hype by suggesting that these AI models — while seemingly flashy to the unlearned consumers — are not that innovative.
To be clear: I’m not criticizing OpenAI’s work nor their claims.
I’m trying to correct a *perception* by the public & the media who see chatGPT as this incredibly new, innovative, & unique technological breakthrough that is far ahead of everyone else.
It’s just not.
— Yann LeCun (@ylecun) January 24, 2023
Regardless of whether or not the technology works or fails, is good or is evil, the venture capital industry has found a sector where it can write massive cheques, draw down its $300bn of committed capital and to collect its management fees.
To further sweeten the deal, the public reaction to ChatGPT has created the beginnings of a wave of enthusiasm for a technology that could — despite having no immediate monetisation model — see retail investors start to get excited and reopen the public market off-ramp once again.
But there will be a lot of long faces around Silicon Valley if the excitement fizzles out again. Just look at Alphabet’s $50bn stock market slide after its own AI chatbot Bard had a badly receive premiere. The AI hype giveth and the AI hype taketh away.