AI Unicorns Are Running Amok

A growing number of skeptics— including many on Wall Street — are getting increasingly nervous about the “AI” bubble. But that hasn’t stopped money from flowing into AI startups, according to a new State of the Markets report by Silicon Valley Bank. The report points out that “More AI companies are becoming unicorns,” and it is happening at earlier stages than non-AI companies, despite the downturn in venture capital investing.

• Twenty-eight (38%) of 73 new unicorns in past 18 months are AI companies.
• Top 25% of AI unicorns reach $1 billion valuation in under 2 1/2 years
• Late-stage AI deals account for half of late-stage investment, and the median AI company is valued 68% higher than non-AI companies.
• Thirty percent of AI unicorns are classified as early stage, compared with 11% of their non-AI counterparts.
• As of June 30, 2024, there were 736 unicorns.
• Now, thanks to AI investments, the top 10 U.S. venture capital deals capture 20% of total fundraising, up from 9%, with much of the VC money being spent on GPUs.

The “GPU” spending is reminiscent of the massive investments in Sun Microsystems servers and Cisco routers and switches during the initial buildout of the internet and the dot-com boom (bubble). While not all dot-coms survived, a handful, such as eBay and Amazon, evolved into generational companies. Encore, anyone?

The aspect outlined in the SVB report, that unicorns aren’t dying, shouldn’t be overlooked.

• Only 12% of U.S. tech unicorns are well-positioned for IPO.
• The median U.S. tech unicorn has more than 20 months of runway.
• About half of unicorn companies are more than 10 years old.
• Graduation rates remain below historical norms — there were just five U.S. venture capital-backed tech IPOs during the first half of 2024.

What does that mean:

• The market pullback and the end of the zero-interest-rate policy are affecting growth trajectories.
• These companies face some serious survival challenges, so don’t be surprised by big failures.
• Graduation levels will remain below historical norms until the backlog of companies is reduced.

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FINAL THOUGHTS

As someone who has been around this world of technology, startups, and venture capital (in many different roles), let me tell you that there isn’t a new trend venture capitalists don’t love. New trends mean new companies to back and hope that there is a winner or two in those bets. It’s a good way to deploy dollars, raise future funds, and stay busy. That’s really the business in a nutshell!

It’s all about increasing the surface area for coming up with hits. Crypto craziness did produce a Coinbase. The gig economy mad rush has produced Uber, DoorDash, and Lyft, among others. The Web 2.0 and social networking boom-bust cycle led to Twitter, Facebook and Instagram. This “AI” boom/bubble is going to throw up winners. In the end, what really matters is which side of the bet you come out on. That’s what allows you to get to the next bubble — and eventual bust.

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