for VC, the success of AI is existential
Imagine entering VC in 2020, full of enthusiasm about a wave of technology that felt unstoppable. Your peers are impressed; it’s a prestigious industry that is perceived as commanding a lot of power (and capital).
You have to put aside your personal thesis in favour of the firm’s strategy on crypto, micromobility, rapid delivery, creator economy, and web3. Each of those sectors have promised outsized returns through their potential to reshape whole sectors or industries. It’s an exciting time, though you’re not feeling as involved as you would like to be.
In fact, you’d quite like to make the case for investment in other industries; overlooked opportunities which offer larger ownership stakes and cleaner cap tables. It’s difficult to justify the change of strategy when the biggest markups are all coming from a few hot sectors, so you avoid the friction.
And Andreessen and Sequoia can’t be wrong, right?
Capital is flowing into the asset class from LPs at an unprecedented rate. Rather than pressure to justify and properly diligence investments, you are pressed to ensure capital is deployed and opportunities aren’t missed. Access to hot deals and co-investment with the tier-1 firms is how you stay relevant to LPs. Success is now largely dependent on your relationships across the industry.
It creeps up on you that your colleagues have stopped talking about exits. There’s no rush for any portfolio to go public. Now the conversation is about pricing and the appetite of downstream investors. Beyond that, it’s someone else’s problem.
For the first time, your spidey-senses start to tingle.
Early in 2022, ripples of concern spread across the industry. Worries of recession, interest rates on the rise, and a weak public market that has already repeatedly rejected VC-backed IPO valuations. In simpler times, you would have bouyed enthusiasm by highlighting remarkable fund performance. Now, the idea fills you with dread. None of your portcos are growing much, and you know that pricing will collapse if anyone starts really scrutinising revenue.
With surprising speed, the tables turn. An era of unprecedented growth and optimism comes to an end. Y Combinator writes the eulogy with an open letter to their portfolio companies. Venture-backed hypergrowth is shelved in favour of finding a path to profitability. The red-hot sectors which had promised game-changing returns are quietly scrubbed from websites and bios.
By Mid-2023, venture capital feels like a fever-dream. Many of the most exciting investments from 2020 and 2021 have imploded or recapitalised. Layoffs are the norm, even for many VC firms. Nobody in the arena wants to talk about why.
Fortunately, nobody needs to dwell on the downturn for too long: the unveiling of thrilling new AI tech from companies like OpenAI and Midjourney offers the perfect source of distraction.
OpenAI and Midjourney have fired the starter pistol for a dotcom-sized revolution in technology. The incredible possibilities offered by powerful, accessible AI models will spawn companies with growth potential not seen since the early years of Google and Amazon. It promises to easily turn-around a few years of poor performance for the venture asset class.
Of course, there are nay-sayers. Not those who speak of an AI-driven apocalypse, for at least they buy into the incredible scope of the technology. They are believers. The real problem are the cynics.
The cynic’s claim is that today’s “AI” is just an evolution of decades-long work on machine learning, neural networks and natural language processing. Yes, the hardware is a lot better, processing at scale is much easier, but fundamentally not a huge amount has changed. What commercial applications there are will mostly favour incumbents who have the data and the distribution. It’s not the generational game-changer that venture capitalists claim.
Those who believe the hype, both the self-proclaimed “accelerationists” and the “doomers”, preach the gospel of salvation for an entire generation of managers. The narrative battleground is shifted to the conflict between these two groups, away from the cynics who offer nothing but grim reality.
Evangelism reaches new heights. Marc Andreessen who led the charge on the 2011 – 2022 bull run with his essay, “Why Software Is Eating the World“, proclaims even greater optimism with the publication of “Why AI Will Save the World“.
It gnaws at you. Do you really believe? Do the numbers make sense, or is venture capital back at its usual bullshit? Is it your responsibility to just blindly support this as an insider?
Worse, what if this fails too? The consequences for the venture asset class are difficult to contemplate.
At some point, you are sure the music is going to stop.
Until then, the only path you can see is to continue following your peers. As long as you are all doing the same thing, no failure can be pinned on you.
Each day you scramble to find the hottest AI deals in your network and secure allocation. It’s not easy, and LPs are reluctant to part with capital. To many, this is just the latest in a string of gold-rush opportunities. You keep making the same promises and assurances.
You lean into the identity, blend into the herd. Any sense of irony in wearing the uniform disappears. You begin preaching from the same book about the transformative nature of AI.