French startup Mistral AI didn鈥檛 have a working product when it raised 鈧105 million (US$118 million) in one of Europe鈥檚 largest-ever seed rounds last month. But Antoine Moyroud, a partner at Lightspeed Venture Partners, one of the biggest backers of the fledgling firm, wasn鈥檛 fazed.
鈥淚t may seem like a very big number,鈥 he told CNN, but the company has big, global ambitions and needs a lot of expensive computing power to see that through, he said.
The blowout deal is just one example of the feverish excitement surrounding the potential of 鈥済enerative鈥 artificial intelligence 鈥 which can create original text, images and other content in response to prompts from users 鈥 to generate whopping returns for investors.
But some investors and people in the industry are worried the funding frenzy is turning into a bubble, with money thrown at companies that have neither earnings nor an innovative product nor the right expertise.
Emad Mostaque, founder and chief executive of Stability AI, a generative AI firm that also counts California-based Lightspeed among its funders, expects the current wave of investment in AI companies to create 鈥渢he biggest bubble of all time.鈥
鈥淚 call it the 鈥榙ot-ai鈥 bubble, and it hasn鈥檛 even started yet,鈥 Mostaque said recently, referring to the 鈥渄ot-com鈥 bubble of the late 1990s, when speculative bets on nascent internet companies ultimately resulted in big losses for many investors.
The investment into Mistral AI is just one of many this year by venture capitalists jostling for a seat aboard the AI rocketship. In the first six months of 2023, they plowed $15.2 billion into generative AI companies globally, according to Pitchbook data.
The bulk of this sum comes from Microsoft (MSFT)鈥檚 $10 billion investment, announced in January, in OpenAI, the developer of popular generative AI chatbot ChatGPT.
But even excluding Microsoft鈥檚 bumper deal, the value of VC investments in generative AI was up by almost 58 per cent compared with the same period in 2022.
The release of ChatGPT to the public in November was the catalyst for the current buzz, according to Moyroud at Lightspeed. He has seen an increasing number of founders mention generative AI in their pitches for funding 鈥 but he takes some of those pitches with a pinch of salt.
鈥淲e鈥檝e [seen] some people that haven鈥檛 necessarily spent a lot of time in the industry and are adding 鈥 if you could say so 鈥 a bit of generative AI sparkle鈥 to their pitches, Moyroud said, noting that it takes time to tease out the 鈥渟ubstance鈥 behind some founders鈥 claims.
He doesn鈥檛 include Mistral AI in that group. Moyroud鈥檚 venture capital firm 鈥 which he would only say contributed a 鈥渟ignificant portion鈥 to the startup鈥檚 鈧105 million haul 鈥 was paying a premium for the three founders鈥 鈥渦nmatched鈥 experience: Previously, they all worked with a type of generative AI called a 鈥渓arge language model;鈥 two of them at Meta, Facebook鈥檚 parent company, and one at Google鈥檚 DeepMind.
鈥淭here鈥檚 only a subset of maybe 80 to 100 people in the world who have had the experience training large language models鈥 [and] at scale,鈥 Moyroud noted.
It鈥檚 not just big-money private investors hoping to cash in on the AI boom: Flows into the world鈥檚 top five AI-focused exchange-traded funds have ballooned by an average of 35 per cent since the start of the year. And, after a bruising 2022, stocks on the tech-heavy Nasdaq index have soared nearly 42 per cent over that time, outpacing the broader S&P 500 index, which has risen less than 19 per cent.
In May, Nvidia, a U.S. maker of the advanced microchips required to power generative AI, became the sixth company in the world to reach a market capitalization of $1 trillion. Its stock has soared by 207 per cent since the start of the year.
But Nvidia鈥檚 stock has also traded on a price-to-earnings ratio 鈥 a measure of whether a share is over- or undervalued 鈥 of 237 over the past 12 months. The higher the ratio, the more likely a stock is overvalued. For comparison, companies on the S&P 500 have traded on an average ratio of 24 over the same period.
While Nvidia is profitable, C3.ai, an AI software company whose stock has soared over 240 per cent this year, is not 鈥 and is not expected to be, either this year or next.
The situation is strikingly similar to the dot-com bubble, investors told CNN. But, with every bubble, there must come a pop.
As investors funneled money into dot-com companies from late 1998, the Nasdaq鈥檚 value more than doubled during 1999 alone. But, despite high hopes and huge valuations, most of the startups , according to Goldman Sachs. Stocks on the Nasdaq nosedived 81 per cent between its peak in March 2000 and late September 2002. The bubble had well and truly popped.
Mike Reynolds, vice-president of investment strategy at Glenmede, a U.S. wealth management firm, said the current excitement is 鈥渞eminiscent of the [90s] tech bubble when a lot of鈥 companies weren鈥檛 turning earnings yet, but people were getting so upbeat on their prospects that they were willing to bid [their stock price] ever higher.鈥
鈥淲e鈥檙e yet to really see [the AI hype] translate into concrete fundamental results,鈥 he added.
It will be 鈥渧ery difficult鈥 for investors to know if they鈥檙e backing the AI equivalent of the next Amazon (AMZN) or Google (GOOGL), Reynolds said. Of the 10 most valuable tech and communications stocks today, only two 鈥 Microsoft (MSFT) and Cisco (CSCO) 鈥 were in the top 10 at the peak of the dot-com bubble in March 2000, according to an analysis by Glenmede.
鈥淚t鈥檚 not always obvious who the long-term winners of innovative disruption are going to be,鈥 Reynolds said.
In the late 1990s, he added, a firm could 鈥渏ust put the word 鈥榙ot-com鈥 at the end of their company name, and their stock price [would go] up 10 per cent the next day.鈥
Jordan Jacobs, co-founder and managing partner at Radical Ventures, a Toronto-based VC firm specializing in AI, has spotted a similar impulse among tech founders today.
鈥淏uying a 鈥榙ot-ai鈥 domain, and claiming to be an AI company鈥 doesn鈥檛 really make you an AI company,鈥 Jacobs told CNN. 鈥淎s investors, one of our jobs is to figure out who鈥檚 real and who鈥檚 not.鈥
Jacobs, who has founded two AI companies in the past 13 years, said he thinks there is a 鈥渃omplete lack of appreciation鈥 for just how valuable the technology will be further down the line.
He predicts AI will be integrated into, or completely replace, every piece of software within the next decade, producing 鈥渢rillions of dollars of economic value.鈥 The technology is also breaking new ground in the field of drug development and climate change modeling, he said.
The release of ChatGPT, combined with Microsoft鈥檚 blockbuster investment in OpenAI, caused 鈥済eneralist investors to suddenly wake up鈥 to AI鈥檚 extraordinary potential. It was also a moment when everyone finally got to touch the technology.
That, he said, felt 鈥渁 bit like magic.鈥
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