Is There an AI Bubble? VCs on Valuations and ARR Inflation

**Connie Loizos** (0:01)
Hi, I'm Connie Loizos.

**Alex Gove** (0:02)
And this is Alex Gove.

**Connie Loizos** (0:03)
And this is StrictlyVC Download.
Is there an AI bubble? And if there is, does it even matter? Those are the kinds of questions that don't have clean answers right now, and yet we can't help but ask them, including just a few days ago at Strictly VC's newest event held in the El Segundo neighborhood of Los Angeles. There, I had a chance to sit down with two investors who've been navigating this market long enough to know the difference between a wave and a wipeout. My guests were Cheng Xu, a partner at Basis Set Ventures, one of the first early stage funds to focus exclusively on AI, and Carter Reum, founder of M13, which is backed 17 unicorns and manages $2.5 billion in assets. The two joined me in front of a live audience to talk about where the real value is being built in AI, why being first to market might actually mean nothing right now, and what it takes to find the rare company that can survive in the world where the biggest, best funded players in history are coming for everyone. It was a fun conversation for me. I hope you enjoy it too, and we'll see you back here next week.
Well, guys, to start with the most obvious question, is there an AI infrastructure bubble? I mean, I don't know. I can't tell anymore what's happening. I don't know if this is just another cycle or things have fundamentally changed. So Cheng, what do you think?

**Cheng Xu** (1:39)
I think that there is both a bubble and not a bubble. There's not a bubble because we've never seen this type of growth curve before. You have Anthropic, which everyone knows goes from 1 to 40 billion in six months in terms of revenue, and that's just unprecedented growth at that scale. In our portfolio company, we have companies like OpenArt that went from 1 to 10 in one year in year one and 10 to 70 million AR in the second year and being cash flow positive most of that time. It was just 20 people. And that's also just level of growth never seen that before. I think the bar for what is good growth has totally changed. And when you have that, when you have this possibility of compounding, accelerating growth, then the valuations don't seem so crazy because valuation, you price that into the terminal value, into how quickly can you hit your growth. On the other hand, if you price every single deal to that math, there's no way that that will work out well for a portfolio. So it is a paradoxical time.

**Carter Reum** (2:32)
Yeah, I think you hit the nail on the head. I mean, I always laugh because we pretend like this is the first time in venture capital land, but we've seen this before, right? We saw this with cloud, we saw it with the invention of the iPhone. If you think back to the 1920s, people were worried that people were going to lose their jobs to the car and they did and life went on, right? So like you said, I think there are a lot of similarities, except this is steeper and faster. That's why I said, our obsession is right now, we're still talking about the technology, right? We get really interested in what are the implications of the technology, right? The reason we have social networks and consumer software was it was the implication of the fact that we all had a supercomputer in our pocket. And so everyone knows that AI is going to change the world, doesn't take a rocket science sitting in this building to know that. But the key is where's the value layer, right? And I think what's different in this cycle than every other cycle is past cycles it was innovators competing with innovators, right? Zuck versus Evan, Travis versus John Zimmer. In this cycle, you have innovators competing with innovators, competing with the largest, most well-funded innovators the planet has ever seen, also competing with the 10 largest tech companies on the planet. And I would argue that in the first time in history, they actually do have the advantage, right? They have the tech, the capital, the data, the talent. And so I'm of the opinion there's a lot of companies as quickly as they rise, they may potentially fall. So I actually find it harder to invest in a market like this. But as she said, if you get it right, you look like a genius, but you will have a lot of swings and misses.

**Connie Loizos** (4:03)