Why tech investors need to resist another AI hype cycle

It’s been a huge year for generative AI. You just have to look at the number of products now claiming to have baked-in generative AI, or the swathes of companies eagerly finding ways to implement the technology to realise the effect it is having on the world.

ChatGPT, perhaps the best-known example of generative AI, now boasts an estimated user base of over one billion – no mean feat for a technology that only launched in November 2022.

And just last month, in Gartner’s annual ‘Hype Cycle for Emerging Technologies’ report, generative AI unsurprisingly topped the hype cycle in the 2023 report, reaching the ‘peak of inflated expectations’ for the first time.

The excitement around this technology is warranted. It has the potential to transform and revolutionise how businesses run. However, investors need to be cautious.

History has shown us that tech hypes come and go. Not all shiny new technology companies stand the test of time and, in recent months, the sheen on generative AI is beginning to fade.

A study by Stanford and Berkeley, for example, revealed that ChatGPT’s performance is deteriorating, while generative AI startups like Jasper AI have reportedly laid off staff just a few months after raising huge amounts of capital.

Investors, then, need to understand the role they play in this part of the hype cycle and consider the responsibility they have when valuing these companies. This is not only to protect the VC firms and LPs, but also the startups themselves and the wider tech market.

What can investors do?

Firstly, look beyond the marketing materials. What often lies beneath the polished brand of a “ChatGPT startup” is a superficial application layer built directly on top of OpenAI. What happens if OpenAI ceases to exist? So too does that company – and that means it lacks long-term viability.

The products that provide the most value to their customers, in the long-term, come out of companies that invest significant time and resources into integrating new technologies like generative AI into their own products.

Secondly, assess the long-term viability. Amidst the excitement and promises of these new innovations, it’s easy to make snap decisions around return on investment.

In reality, we need to pause. Are we genuinely considering the long-term potential of a company – its set-up and use cases? Does this company have a solid long-term plan for truly sustainable growth? Or are we merely caught up in an AI hype cycle?

Undue optimism and jumping on a hyped trend can, in the worst case, artificially inflate valuations, creating a situation that ultimately disappoints investors, LPs and the companies themselves. This scenario only serves to hinder the achievement of sustainable, long-term growth that is aligned with investor expectations.

For investors, this is a tricky situation to be in, since a plummeting valuation brings with it a tarnished reputation in the investment community. The result? They’re unlikely to be front of mind when the next groundbreaking investment opportunity comes along.

Thirdly, don’t underestimate the tech giants. No matter how great the innovation is, not every technology startup will be able to battle the likes of Google and Microsoft.

We need to keep an eye on the promises made by these glittering technology startups in light of the resources available.

We may encounter a select few companies who are able to dominate new and emerging spaces quickly but, realistically, the majority of ChatGPT startups do not have the computational resources or stacks of cash to develop technology that will overthrow the similar models being developed by the industry giants.

Investors need to carefully consider where investments are to be made and whether a startup really does address a niche point in the market. Can they sit alongside – or even complement – some of the developments coming out of Google? If not, even the largest of financial investments won’t stop these startups from falling flat in the long term.

Companies built on ChatGPT won’t last 

Investors never want to miss the next big thing. But before getting carried away, we need to ask ourselves serious questions about the companies we’re investing in. What are the limitations? Are we excited because of the lasting opportunity or because of an AI hype cycle?

I believe that most companies built on ChatGPT won’t stand the test of time and will ultimately fail.

The best founders, however, will find ways to enhance existing products to deliver even better customer experiences and drive operational efficiencies that will help fuel their growth. Those that do this, and the investors that support them, will see the greatest returns.

Alex Pavlov is a partner for venture capital firm RTP Global.