AI cargo cult and Venture Capital
There has been a lot of cargo culting among #VC as to #AI recently. They en masse look for startups with AI “ingredients”. This reminds me a lot of the crypto craze. Despite AI being more applicable and useful than crypto (the illustration was created with DALL-E 3), apparently, many forget that AI doesn’t have an economy-of-scale advantage and becomes a severe cost burden for businesses.
Both Microsoft and Google don’t make money on AI. Actually, Microsoft’s Copilot loses around $20 per user every single month and for some users even a whopping $80. Its Bing uses AI as a significant CAC expenditure to lure users from Google. It’s a huge loss every single month. With every new user expenses scale proportionally becoming an even bigger burden.
At this stage, AI isn’t a venture type of business that could easily scale. It doesn’t guarantee future profits if startups burn huge amounts of money to attract users. Especially if said startups don’t own AI models they use and build their castles on somebody else’s API land.
Google itself had ChatGPT level AI ready years before OpenAI but it didn’t want to use the AI due to it being too expensive. It would eat into the margins. There was no logical reason for Google to implement AI and offer it to users. It didn’t see any possible financial returns as a result of implementing it and giving access to billions of users.
An average user doesn’t look for an AI-based service specifically but rather needs a solution for a particular problem or task. If anything, VCs should look for startups that manage to provide a solution to their users WITHOUT using AI and WITHOUT the extra costs of using AI. VCs should be looking for startups with product/market-fit and not those that use AI for the sake of AI itself.
Properly speaking, VCs should ask every startup that tries to pitch an AI service whether the service could be provided without AI, whether the unit economy works, and whether the service could be scaled without creating Uber-type demand for new investments with the increase in the user base.
