AI Startup "Shakeout" of VC Investment Money - AI Startups Will Start Dying in Mass

Eli the Computer Guy (0:00)

It looks like we are about where we are supposed to be for this particular technology cycle. Now, one of the important things to understand when you come to these videos from Eli the Computer Guy is many times when I'm talking about artificial intelligence, one of the things that I'm trying to discuss is essentially the life cycle of a technology, right? Whether it is artificial intelligence, whether it is the birth of the internet, whether it is mobile devices, that type of thing, VR, all technology has a life cycle, and we have already seen these things come and go numerous times. And one of the things I try to warn people in the corporate world about is whatever your feeling is about artificial intelligence as a technology stack. Whatever your feeling is about this particular investment boom, one of the things that you do have to consider is that when you look at deploying artificial intelligence, into your internal infrastructure, you do need to look at the individual businesses and the business environments because we all know there is a shakeout that is going to come to the AI world where a lot of these companies are simply going to die. A lot of very good companies run by very smart people that you think would be the next Google are going to die horribly because, you know, that's just how the technology world works sometimes, right? And one of the big things that's occurring right now, and we have seen this in every technology cycle, is that initially, when the technology cycle begins, essentially, investors use shotguns in order to distribute money everywhere, right? Nobody has any idea what the next Google or Facebook or Apple is going to be, so they just, they just rain money down on everybody trying to see what the hell is going to work. Now, the problem that's going to happen is they're going to start to see, basically, who is more successful and who is less successful, and as they start to determine who is more and less successful, they're going to narrow the hose of the money down to only focus the money on the companies they think will be most successful, and that is something that you have to be careful about, right? Remember with investors, especially in the technology world, investors don't want 1x returns, right? You put $100 in, they don't want to get $200 out. Come on, that's for real estate investors. That's for the dumb money. They want to put $100 in and get $10,000 out. So one of the problems you can also get into in the tech life cycle is as the stream of money narrows down, many times money will stop going to companies that are viable, right? They've got revenue, they've got customers, they've got growth. They're actually solving problems, people. Get the fuck about. The problem is, is they don't have enough customers. They don't have enough growth. They're not solving enough problems. And one of the weird things you can get into too, is literally from an investor standpoint, many times it's better to bet on a currently failing company that might turn into the next Google, than bet on the successful company that is just gonna keep going along and produce a few returns or whatever else. So many times, the money will actually get focused on the companies that are still failing, and the companies that are successful will actually die because they'll be suffocated from cash. This is the kind of thing you have to be thinking about, again, with the whole life cycle deal thing and all that, with what's going on with artificial intelligence. And so, if we take a look at CNBC, again, and I've been talking about this for a while. So this is the nice thing. See, the nice thing about not being a reporter, see, here's the thing, like with most of the tech journalists and the tech reporters, they don't actually know what the fuck they're talking about, right? They got their degree in whatever the hell they got their degree in. One minute, they're writing about basket weaving, the next minute, they're writing about computers, and therefore, they've got to basically say whatever the companies tell them to say. One of the nice things is, having been in the technology world for over 30 years now, has everybody seen this shit? I can tell you what's gonna happen, not because I've seen it before once, but because I've seen it before like five fucking times. Like this is what always happens. So anyways, just putting that out there. A quote, shake out in early stage AI may be coming as VC money gets pickier on valuations. Yes, it is, because it always happens. Investors should focus on productivity growth in AI companies as valuations in some areas start to look excessive, experts said. Quote, we are likely to see a shake out as investors become more demanding about where the technology creates genuine value and where it is simply a feature dressed up as a business, said Jacob Nitra, founder and partner at venture capital firm Purple Ventures. He expects capital become much more selective over the next six to 12 months. And so that's one of the big things too, with these startup companies. Remember, when they go out for investment rounds, the idea is the founders go out, they beg for money. They spend a lot of time begging for money. And then once they get the money in, that's supposed to give them a runway. And the runway is essentially the length of time before the money runs out again. So somewhere between 12 to 36 months, somewhere between a year to three years is supposed to be what their runway is. And so the idea is that the founders can then start focusing on the business again, and they're not constantly drumming up money. One of the big problems you can run into in the startup world, though, is you can be going along doing pretty well, right? You're the da-da-da-da-da-da-da. And so you're getting to the end of the runway, right? And in normal times, it's no big deal. It's like, okay, we got our funding two years ago. We have made all of this progress. We have made all of these gains. So now we're going out to the next funding round. But like what happened during COVID, right? So you had startup companies that were trucking along. They were going through their runway. They were getting ready to do the next funding round, and then COVID hit, and all the VCs closed their pocketbooks. And here's the thing, no matter how good your pitch is, it doesn't matter if the VCs ain't writing any checks at all, right? And that's going to be one of the interesting things to see with the current round of AI companies, is as they, I want to say burn, that's not necessarily derogatory, as they burn through their previous funding round, as they get to the point where they need to do a next funding round because their runways are shrinking, what's going to be interesting is what happens when they get to the end of the runway, and people just decide they're not willing to write a check for whatever the hell it is that they're doing anymore. I think it's going to be interesting. And that's one of the things you need to be focused on right now, especially with your vendors, the vendors, the products, those types of things, is if we're talking about VCs becoming more selective over the next 6 to 12 months, that is what essentially that means, is we are going to start to see AI startup companies failing in the first quarter of 2027, somewhere between the first quarter of 2027 to the third quarter of 2027, is where we should start to see a lot of these AI companies start failing because they simply get to the end of the runway, and there's nothing left and nobody's willing to write checks for them, so be careful. Be careful about that. The next question is whether applications and end users generate enough productivity, revenues, and cash flow to justify that investment. And again, the real world word there is enough. It's not simply that they are generating, they could be actually generating profit, but is it enough to justify that investment, said David Ng, co-founder and executive officer at wealth management firm Archi Finance. While AI can transform the economy, not every company with AI in its pitch deck deserves an extraordinary valuation. The winners will be companies using AI to solve expensive and highly complicated problems. Quote, if a bubble does pop, it will most likely damage those that invested in the FOMO led froth, he said, but the infrastructure that has been created will still be used and prove game changing for many companies. And so this is where, this is where, you know, we start to, again, we get through the shakeout phase of the AI, of the AI life cycle.