Every investor is talking about the impact of AI. And, with the launch of tools like ChatGPT bringing AI into the mainstream, companies have been rushing to implement the hottest AI tools in an attempt to not be left behind. However, we desperately need to take a more balanced view of AI and similar technologies when it comes to investment.
For example, many AI tools like ChatGPT are, by no means, a scientific breakthrough in either computing or in the understanding of the human mind. Generative AI tools use an immense amount of computational power applied to a broad data set. And that reality is why the hundreds of startups that have exploded into the market with ChatGPT-based solutions will likely fail.
That’s not to say that generative AI won’t bring massive opportunities to the companies that implement it correctly. It most certainly will. However, the important lesson we must take from this is that technology investors must not rush to invest in the ‘next best thing’. They need to be cautious about fuelling another hype cycle as we’ve seen with AI, considering the responsibility they have when valuing companies that use these technologies. This needs to be said to not only protect VC firms and LPs, but also the startups themselves and the wider tech market.
Resisting ‘the next big thing’
Technology investors are naturally keen to spot the next groundbreaking innovation, yet it is vital to maintain a critical view when evaluating potential opportunities. With endless media discussion, it’s easy to fall victim to rash investment decisions that don’t fully consider the long-term potential of a company, the use cases of its technology and more.
Investors also need to question whether the company has a sound long-term strategy for sustainable growth. Investment stories of the past should provide adequate warning for what happens when large sums are quickly injected into the most popular companies on the block. Take WeWork for example – it experienced the greatest popularity at its peak, but with staggering overvaluations as a result of reckless investment, substantial financial losses were the only realistic outcome.
Scrutinising a technology company before making an investment is a responsibility that all investors have. Why? Because jumping straight onto a hyped trend can lead to unrealistic investments being made, which artificially inflates valuations. In the long run, this only leads to disappointment for investors, partners and the companies themselves. And of course, the reputation of the investors can be tarnished too.
Hazards on the horizon
It goes without saying that we must devote time to thoroughly assess the risks posed by even the most enticing new technologies. Several “ChatGPT startups” serve as cautionary tales, where a polished facade conceals a lack of substantial product innovation. Many firms promising delivery of the next big thing simply construct superficial application layers on top of existing technologies, as we’ve seen with those lifting OpenAI technology. What happens if the underpinning technology company ceases to exist? With this heightened risk comes reduced long-term viability.
That being said, the greatest technological innovations are often born out of existing developments. One thing for investors to watch is how a company takes inspiration from one technology to evolve the next. Either way, what’s needed is carefully balanced consideration for all factors involved – investors must step back and ensure they’re not blindsided by the hype. Appropriate due diligence not only minimises risk but also sets the stage for greater success in any investment.
Confidently securing the future
Investors never want to miss out on the next Apple or Google. But before getting carried away, we need to ask ourselves serious questions about the companies we’re investing in. Are we excited because of the lasting opportunity or because of the hype cycle? History has taught us that there are huge risks for all stakeholders when it comes to feeding a hyped trend.
