AI Enthusiasm is Not a Bubble and Even if it was We Wouldn’t Necessarily Know it Yet

It’s Very Likely That Artificial Intelligence Will Be Worth More In Aggregate Than is Currently Being Invested (Just Unevenly Distributed)

In kindergarten my daughter learned to not ‘yuck’ someone’s ‘yum.’ That is, just because you don’t like something there’s no reason to share that in the moment with another person enjoying it. There’s a lot of yumming AI right now and it’s of course perfectly fine (often helpful!) to challenge this excitement on technical grounds. Or ask questions about responsibility and legality. Or question business models. But to respond to the current state of affairs but just shouting “BUBBLE” isn’t just valueless Yucking, it’s likely incorrect.

During the Installation Phase of a new technology (HT Carlota Perez) there’s a bubble phase that coincides with the frenzy ahead of deployment. It’s when it feels like the New Thing has limitless upside, that “anything is possible and everything before will be disrupted” mindset. This is largely a feature, not a bug, of our industry (and of venture investing). The challenge of course is to not blindly anoint any fad as the New Thing, and to defensively protect the New Thing from any criticism. Both of those lead to fake or inbred New Things.

Source: AVC

But from an economic point of view, let’s better understand what a ‘bubble’ actually means, because it’s often expanded and abused beyond the classic definition.

Bubble, in an economic context, generally refers to a situation where the price for something — an individual stock, a financial asset, or even an entire sector, market, or asset class — exceeds its fundamental value by a large margin. — Investopedia

So to suggest we’re in an AI Bubble is to say that the total enterprise value of AI that can/will be captured by private companies is less than the capital being invested into them right now. If you truly believe this, then yeah, shout Bubble from the rooftops, but I’d take the other side of this bet all day long.

Of course this doesn’t mean that all the value created will accrue evenly or the way investors expect it to. Quite clearly there will be ‘winners’ and ‘losers’ — maybe even some spectacular failures — but this doesn’t mean Bubble.

When a New Things cycle runs its course we end up with one of three realities:

I. Total Value Created < Total Investment Capital Deployed (Bubble 101. Perhaps scooters and other micro mobility startups of the last decade are an example of this?)

II. Total Value Created > Total Investment Capital Deployed *But* Highly Concentrated Winners (the last 15 years of ride share fit this bill? Can still feel like a Bubble even if not the classic definition)

III. Total Value Created >>>> Total Investment Capital Deployed & Multiple (But Not Necessarily Equal) Winners (this is the outcome of truly revolutionary and disruptive technologies. SaaS and Cloud perhaps?)

At a macro perspective, I currently believe this cycle of AI is much more likely to be II or III than I, with a bias towards the more distributed view of III (because I’m an optimist). But my thinking on where value will accrue is still formative and probably requires a separate blog post.

But it’s definitely not a Bubble 🙂