Add AI to your deck, add a zero to your valuation

Sascha: [00:00:03] A four week old AI Start-Up raised $113 million. Whoever said business news needs to be boring. I'm Sascha Kelly and welcome to The Dive. That's the headline we read last week. For a company with no revenue and no product. They managed to convince investors to put in more than $100 million. Feels to me like the lyrics of a Dire Straits song Money for Nothing. It's Wednesday, the 21st of June, and I want to know, are we missing something here or is this a sign that AI hype is reaching fever pitch? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. Alec, welcome to The Dive.

Alec: [00:00:49] Sascha, good to be here. 

Sascha: [00:00:50] Let's start with this one company, Mistral AI, which was founded only a month ago in May 2023, and it raised $113 million in the last month alone. How? Alec, how can I become a multi-millionaire?

Alec: [00:01:06] Yeah, well, in this case, it's all about the people. Mistral AI has three co-founders, and they all are incredibly accomplished. Now, I'm going to apologise for the pronunciation right upfront, but it's led by Arthur Mensch, the CEO who was a research scientist at Google DeepMind. Then there's Timothy Lacroix, a research engineer at Facebook AI and William Lamplugh, a research scientist at Facebook A.I.. So three pretty accomplished co-founders. 

Sascha: [00:01:35] That makes a little bit more sense to me, Alec, because my initial reaction was, who are these dumb investors that they've managed to find to take part in the AI bubble? But in this specific example, they're backing three pretty accomplished minds. You'd have to trust in that expertise that they're going to come up with a product that's pretty cool. So what are they building?

Alec: [00:01:56] Yeah, well, I don't know if you trust them to the tune of $113 million, but what they're trying to build is a text based, generative A.I., so very similar to Google's Bard or Open AI's ChatGPT. And they're really trying to put Europe on the map when it comes to A.I. research and development. Now they've got $113 million in the bank and they are on a massive hiring spree for A.I. researchers, software engineers and product developers. And they're planning to develop their product in France, In Paris, they're based, and they plan to release its first iteration in 2024. So maybe another rival to Chat GPT and Google's Bard, or maybe a $113 million down the drain. 

Sascha: [00:02:45] It'd be pretty nice to have $113 million just for a great idea. So Alec Mistral AI has captured headlines, but it's not the only A.I. Start-Up that's raised big dollars recently.

Alec: [00:02:57] Yeah, not the only A.I. Start-Up that's raised big money recently. We are certainly in the hype part of A.I., and it's really been led by open AI, the maker of Chat GPT. In January, they raised $10 billion from Microsoft, but a number of more established A.I. companies have also cashed in on this moment of A.I. hype and have raised big funding rounds. Cynthia, which makes A.I. avatars for video, raised $90 million. DeepL, which is working on A.I. language translation, raised $100 million and SHIELD A.I., which makes A.I. products for the military, raised $225 million. 

Audio Clip: [00:03:41] This is the Forbes A.I. 50 list, 50 of the most promising privately held A.I. companies in the United States. 

Alec: [00:03:50] But that's not what's really surprising. We know AI's here, and we know the hype is real. What's really surprised us as we were researching this episode is the number of new companies that have just raised money in the past three months. Hippocratic A.I., which was only founded last year and plans to use A.I. for medical diagnosis, raised $50 million. Contextual AI, founded in January this year, raised $20 million. Chroma founded last year, $18 million. Happier Founded in 2021. $14 million. Codium A.I. Founded last year. $11 million. Isles last year $10 million. Koxie. A.I. Founded in February of this year $10 million. I think you get the point, Sascha. I don't need to keep listing them. What we're saying is a lot of companies that have been started very recently with A.I. in their title or in their plans have been able to raise tens of millions of dollars. 

Sascha: [00:04:55] Well, I like when you see lots of companies doing pretty much the same. Thing and lots of money following it. The big question always is, is it a bubble? So let's unpack that question after the break. Welcome back to The Dive. Today we're talking about whether the AI hype that's really taken a hold, a stranglehold of the investing world at the moment. If it's a bubble, I like, let's start there. Is there a technical definition for the word bubble or is it more of a vibes kind of situation?

Alec: [00:05:27] I mean, there's a definition. It's when we say a period of rapidly increasing prices of an asset or of a market that greatly outstrips the growth in intrinsic value of that asset or market to a point where it becomes unsustainable. And then after the bubble, we have the bubble bursting. And, you know, the classic example of that is the telecom bubble of 1999 and 2000. But we also have the crypto bubble of 2021. And, you know, back in the day, there have been a number of different bubbles going all the way back to tulips in the Netherlands in, I don't know, the 14th century or something. 

Sascha: [00:06:08] That's certainly the one in all the textbooks. Look, we don't have enough time to get into tulips today, so let's stay focussed on what is happening here. 

Alec: [00:06:17] Yes. So there is a bubble that's starting to become really quite clear. The New York Times reported that Silicon Valley investors are now so intent on finding air opportunities that they are, quote, trolling through the rosters of companies like Google, Meta and Openai. For A.I. experts who may have an itch to start their own company. Imagine if your skills were so in demand that investors were cold emailing you saying, Hey, I know you've got a job, but do you want to start a company? I'll write you a check. That's literally what is going on at some of these big A.I. companies like Google and Meta. 

Sascha: [00:06:53] Must be nice. 

Alec: [00:06:54] The New York Times also wrote about Mobius AI's fundraising. That company that you spoke about earlier that raised $113 million when these A.I. researchers left Google and Facebook this year to start their company. They weren't sure what the product would be. They just knew it would involve A.I. technology and planned for it to be able to generate its own photos and videos within a week of them leaving the company. Two of Silicon Valley's top venture capital firms, Andreessen Horowitz and Index Ventures, had reached out to them and offered them funding, still without a plan. Once they took on that money, word spread and other investors descended upon Mobius, asking them to take their money as well. So these A.I. companies are getting money thrown at them at the moment.

Sascha: [00:07:44] It's such a good visual. 

Alec: [00:07:46] But it's not just the funding markets that are sort of fixated on AI. It's also the entrepreneurial talent, especially in the United States. Y Combinator is the famous Start-Up incubator, where some of the best companies now in recent history have gone through Airbnb, being quite a famous one at the current cohort of Y Combinator Start-ups. At least 50 of the 218 companies are working on generative AI. So the money's going in that direction. The talent is going in that direction. I guess the whole world is going in that direction. 

Sascha: [00:08:20] Well, if we're all going in that direction, Alec, what are we going towards? What is this money for? 

Alec: [00:08:24] Yeah, so AI is expensive. That's the starting point. That's part of the reason why they're raising such big funding rounds. The amount of data that these large language models need to digest requires a lot of computing power, and that computing power is expensive. Mike Volpi, an investor at Index Ventures, one of the firms that put money into Mobius AI, has estimated that Start-ups need at least $500 million to develop their own large language models like the technology that underpins Chat GPT. 

Sascha: [00:09:00] So to return to a question that I kind of humorously posed at the beginning, are these investors irrational? Are they going to make a return? 

Alec: [00:09:10] Those are two separate questions, Sascha.

Sascha: [00:09:13] Okay, well, let's take the first one. Are they irrational? 

Alec: [00:09:17] Well, probably not. They expect to make a return here. Salesforce, the software giant, has put aside $250 million to invest in generative A.I. Start-ups. Johnson Ogi, who is leading Salesforce's venture investments, was quoted as saying, There are a few times in technology where you really see a generational leap forward with revolutionary technologies. These companies are the next trillion dollar opportunities in software, and if some of these companies that are raising a lot of money now can achieve trillion dollar valuations or even multibillion dollar valuations, these early investors will do very well. So in that sense, Sascha, they're not irrational. But let's go to your second question. Will they make money and the. Classic analogy here is the Internet of the early 1990s. A lot of what investors said at the time was real. The investment thesis worked, but it just took time to play out. And many of the companies that got the initial money collapsed well, before then there was Pets.com, which raised more than $100 million on the belief that you could sell pet supplies online. They collapsed, but they weren't wrong. Now we say Amazon and Pet Circle and Zoo Plus in Europe, they're all selling pet supplies like nothing else online. It's just the early company was too early and it collapsed. Do.com raised 135 million because they believed you could sell clothing and fashion online. Again, they weren't wrong. We say that today. They were too early. They burnt through their money and collapsed. And now we have JD.com, H&M, Shein, a source, all doing what they pitched 30 years ago. Now, Web has raised $400 million to do online grocery delivery in 30 minutes or less. They spent all that money and collapsed. But online grocery delivery is a thing. Although the milk run did collapse and then got bought by Woolworths. 

Sascha: [00:11:33] Yeah, I was going to say there's a long list of fallen heroes in that space. 

Alec: [00:11:38] Yeah, but you could open your Uber up today and get groceries in less than 30 minutes. Again, they weren't wrong. They were just too early. There was another one PayPal sound, which raised tens of millions of dollars to make online music streaming a thing. They collapsed. About ten years later, Spotify comes through and establishes the market. So I think that's the key thing to remember here. Some of these AI companies might be the next Microsoft. They might be the next Amazon. They might be right in the middle of the bubble and they might ride it out and become giants. But a lot of these companies will have business models that make sense. When we look back at them, they were just too early. The surrounding technology wasn't quite there yet. Customer adoption wasn't quite where it needed to be. And so some of them will burn through this money and fail. Only four, five, ten years from now, another company will pick up where they left off and succeed with that business model.

Sascha: [00:12:33] Well, it's going to say, Alec, you've set the scene for a really exciting time that's going to come up ahead. So I for one, I'm really excited to see what's going to happen with AI, but let's leave it there for today. Perfect time for me to go and brainstorm how on earth I'm going to make The Dive an AI powered podcast.

Alec: [00:12:51] Yeah, that would be nice. 

Sascha: [00:12:53] In the meantime, please, for this dear friend, maybe someone who is obsessed with Chat GPT about mid Journey wants to start thinking about investing in this space and we'll be back to talk to you on Friday. Thanks for joining me, Alec. 

Alec: [00:13:06] Thanks, Sascha.