Anyone observing the news can see that artificial intelligence and machine learning have been getting lots of attention for the past few years. It goes without saying that startups are playing into this trend and raising more money than ever, as long as they have AI or cognitive technologies in their business plans or marketing material. Not only are startups raising increasingly eye-opening amounts of money, but venture capital (VC) funds themselves are raising skyrocketing levels of new capital if they focus their portfolios on AI and related areas. But are we in a bubble? Are these VC investments in AI realistic or out of control?
Why so much interest in AI funding?
AI is not new. In fact, AI is as old as the history of computing. Each wave of AI interest and decline has been both enabled and precipitated by funding. In the first wave, it was mostly government funding that pushed AI interest and research forward. In the second wave, it was combined corporate and venture capital interest. In this latest wave, AI funding seems to be coming from every corner of the market. Governments, especially in China, are funding companies at increasingly eye-watering levels, corporations are pumping billions of dollars of investment into their own AI efforts and development of AI-related products, and VC funds are growing to heights not seen since the last VC bubble.
If you want to see firsthand this latest surge of AI-related VC investment, a quick search on Artificial Intelligence companies funded within the past three months in Crunchbase will pull up some eye watering results. As of December 2019, over $3.7B in capital has been raised by these firms just since October 2019! That’s both remarkable and concerning. Why is there so much money being pumped into this industry and will this sugar rush be followed by the inevitable sugar crash and pull back?
There are a few reasons why this investment might be rational. Just as the Internet and mobile revolutions in the past decades fueled trillions of dollars of investment and productivity growth, AI-related technologies are promising the same benefits. So this is all rational, if AI is the true transformative technology that it promises to be, then all these investments will pay off as companies and individuals change their buying behaviors, business processes, and ways of interacting. No doubt AI is already creating many so-called “unicorn” startups with over $1 Billion in valuation. This could be justified if the AI-markets are worth trillions.
So, what is this money being used for? If you ask the founders of many of these AI companies what their gigantic rounds will be used for you’ll hear things like geographic expansion, hiring, and expansion of their offerings, products, and services. The difficulty in finding skilled AI talent is pushing salaries and bonuses to ridiculous heights. Not only do startup companies need to compete with each other for great talent, but they need to fight against the almost unlimited deep pockets of the major technology vendors, professional services firms, government contractors, and enterprise end users also fighting for those scarce resources. A million dollars simply doesn’t go that far in hiring experienced AI talent. Heck, even $10 Million doesn’t go that far. So, an early-stage round of say $20M with almost half going to hiring and the rest to business development isn’t completely bonkers.
However, what about the billion-dollar rounds that are making headlines? Why would companies need to raise such ludicrous amount of money? The best reason that comes to mind: it’s a land grab for AI market share. The general rule in the technology industry is that the big winners are the ones who can command market share first and defend their turf. Certainly there’s nothing that unique about Amazon’s business model. Yet the reason why they are such an almost unbeatable force is that they aggressively expand and defend their turf. If you have a lot of money it’s easy to out spend the competition, or buy them. Companies that want to become global leaders need to “land and expand” which means finding some easy way into a customer deal and then expanding on that deal later. This might mean losing money on the initial transaction, which quickly can burn lots of money. These unicorn startups also need a lot of capital to go up against the big established players like Amazon, Netflix, Facebook, Microsoft, Google, IBM and others. Venture funds believe that these startups can be the new entrenched players of the future, and as such, need capital that will back them to the point where their dominance can’t be denied.
There are many other reasons why such high levels of investment and valuation are necessary. Many AI technologies, such as self-driving vehicles, are still in the research and development phase. It’s not simply a matter of banging out code and throwing servers and technology up to get these technologies working. This AI R&D costs a lot of money to create, build, and test. The downside to the need for all this R&D investment is that it pushes companies who have been funded under the promise of their AI technology, but unable to deliver on those promises, to succumb to the disturbing trend called pseudo-AI, in which humans are doing the work that the machines are supposed to be doing. Some of this capital could be needed to hire humans who do the work of the so-called “AI systems” until the technology is actually able to provide the promised capabilities.
Enterprises are also spending their money and time buying and implementing cognitive technology solutions from emerging technology firms and clearly want AI solutions that can solve their problems. The problem is that enterprises aren’t as patient as venture capital firms, and VC firms aren’t particularly patient either. They won’t put up with fake AI or lack of market traction. If enterprises lose faith in the ability of AI to solve their problems and start rejecting “fakery”, there won’t be much opportunity for “makery” and that’s the biggest danger of all this AI investment. If the AI solutions can’t live up to the hype, the bubble will rapidly deflate, taking with it all the energy, time, and money from the space. This could then deliver a major setback to AI adoption and growth in the long term, resulting in a new AI winter.
Keeping the AI Beast Fed or Suffering Withdrawal
There are really only two outcomes for these super-funded companies. Either AI proves itself as the great transformative technology that startups, established technology players, enterprises, governments, and consulting firms alike promise it to be, or it doesn’t. If it is in fact the next big wave then all these investments are indeed sound, and the investments will pay off handsomely for those firms that can the last person with the seat in the game of market share musical chairs. However, if the promise of AI fails to materialize, no amount of external funding and puffing can keep this bubble inflated. VCs firms are, after all, beholden to their fund limited partners, who want a return for their investment. These returns are realized through company acquisitions or IPOs. Acquisitions and IPOs are in turn fueled by market demand. If the market demand is there, these exits will happen and everyone wins. But if these companies take longer to exit than investors like, or fail to happen at all, then the house of cards will quickly collapse.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
