AI revolution generates ‘hallucinations’ in investors – 01/29/2024 – Market

A new venture capital investor, known by the ugly acronym “Mang,” has been making a lot of noise in Silicon Valley.

Microsoft, Amazon, Nvidia and Google, four of the five largest companies in the United States by market value, have become the main investors in the most promising artificial intelligence (AI) startups.

In doing so, these companies have increasingly alienated the traditional Sand Hill Road venture capital groups in Silicon Valley that like to think they know best how to finance the future.

Of the feared four, Microsoft made the biggest bets, investing $13 billion in OpenAI and also backing Inflection AI.

Amazon and Google have also invested heavily in Anthropic, founded by former OpenAI members. And Nvidia backed Inflection AI, Databricks and Cohere and co-invested with Google in Hugging Face and Runway.

Apoorv Agrawal, partner at investment firm Altimeter, estimates that the Mangs participated in investment deals in data and AI startups worth $23 billion last year — about 30% of the total.

However, as Agrawal notes, for the Mangs these investments are both strategic and financial.

This financial flexibility appears to be bothering some traditional venture capitalists. Benchmark’s talkative partner Bill Gurley last week turned to X to suggest that the Mangs had found a new way to “increase their revenue.”

“Expect a huge mess at the end,” he predicted.

As Gurley’s comments suggest, these investment deals are much murkier than they first appear.

While the stated intention is to accelerate innovation and competition, Microsoft’s partnership with OpenAI has already attracted attention from regulators over whether it constitutes a merger.

This additional concentration of corporate power risks creating a seemingly impregnable complex of intellectual and computational capital in AI.

In a sense, there is nothing new about big companies investing in startups. In fact, venture capital groups have been doing this for years.

In the past, technology companies like Cisco, Intel and Palantir have been particularly active in this game. In 2009, Google launched Google Ventures as an independent venture capital investor. Renamed GV, it now has more than 400 companies in its portfolio and has around US$8 billion in assets under management.

However, the Mangs’ latest round of investments is more than just a financial calculator and doesn’t always involve direct equity participation. The intention is also to access technological expertise, acquire customers and disrupt competitors.

Microsoft has incorporated OpenAI’s technology into its own software services. As major cloud computing providers, Microsoft, Amazon and Google have also offered computing credits instead of cash in some cases.

For its deals, chip company Nvidia has been offering graphics processing units, now in short supply, that are essential for running the latest AI models.

In an earlier era, big tech companies could have simply bought these startups.

As Agrawal notes, they’re not exactly cash-strapped — the Mangs collectively generated $276 billion in operating profit in 2023 and spent $108 billion on capital expenditures.

However, Washington antitrust advocates want to curb the bloat of big tech companies.

This suggests that these huge investments can still be seen as a regulatory maneuver. Big tech companies are actually building customer loyalty while increasing their own revenue.

Regulators are already investigating whether some cloud computing companies are operating like Hotel California, imposing punitive “exit” fees on customers to keep them from leaving.

Early venture capitalists in AI startups involved with the Mangs may welcome the additional muscle — and valuations — that big tech companies provide.

But they may also question how they will get out of their investments, given that they are so involved with the Mangs. Or if they will be sucked in until the end.

For now, the excitement around generative AI is still enticing top researchers to leave big tech companies to create their own businesses, knowing they can easily attract venture capital money.

One example is France’s Mistral, founded by three former Google and Meta employees, which was the talk of Davos last week. And hot-headed venture capitalists are still frantically chasing AI startups with the aim of applying the technology to different areas.

“We haven’t invented a great technology without going through a hype cycle,” says Albert Wenger, managing partner at Union Square Ventures.

The Mangs are poised to dominate the highest strata of the AI ​​economy, but investors believe there are still plenty of opportunities beneath them. Only when the bubble bursts will we know to what extent everyone was hallucinating.