Artificial Intelligence – Magic Money Tree pt. II

A classic example of too much money.

• The loss of 60% of its founders just months after being founded and raising $220m despite having no products, looks like a sign that in the rush to invest in AI, red flags are being ignored and due diligence is being skimmed which always ends in problems.
• The H Company (formerly Holistic) was founded earlier this year by 5 founders from Google DeepMind and despite having no revenues or even products, was able to raise $220m from Accel Partners, Amazon, Samsung and other well-known faces from the billionaire class.
• Now, just 2 months after the raise, 3 of the 5 founders have left the company with the company citing “operational differences” after one of the leavers spoke to The Information and said the same thing.
• This is a strange turn of events and a cynic would immediately begin to wonder if this was an attempt to cash in on the DeepMind name and AI while it remains a super-hot commodity.
• This early break-up signals to me that the investors were so desperate to invest more money in AI that they ignored the warning signs that led to this which has put their investment at risk.
• Typically, this sort of break-up occurs at a point of stress when a company is forced to make a change of direction that had not been previously anticipated.
• This point of stress is usually triggered by either a realisation that the product is not fit for the market (H has no product) or the company runs out of money and has to make sales very quickly (H has just raised $220m).
• Hence, I can only conclude that whatever the cause of the break-up was, it was always there and did not suddenly appear meaning that anyone doing their due diligence properly would have found it.
• Instead, because there is so much money flowing into the sector, projects that would normally fall foul of a rigorous investment process get funded which in turn leads to failures, popped bubbles and so on.
• This is Accel Partner’s first foray into this space making me wonder whether the company was so determined to catch up with its peers that it failed to take a hard look at the H Company.
• The problem here is that 3 of the 5 founders leaving the company will greatly reduce the market’s confidence in this business as a going concern making it harder to sell products (when there are some) and hire staff on the promise of a big equity-based payout.
• The investors are publicly rallying around the H Company stating that they “are confident that they can deliver on this mission and continue to support them” but I suspect that they are deeply concerned about the current outlook.
• To me, this is another symptom of the magic money tree at work and just like 1999 and 2000, many projects are being funded that should not be as a result of the oversupply of cheap money.
• At some point relatively soon, there is going to be a correction where the supply of money dries up, valuations become cheaper, and expectations are set that are based on reality rather than the blue-sky prospect of super-intelligent machines.
• This is why I remain very nervous about the valuations that are being paid for these companies and am staying well away from them.
• If I were forced to invest in this area, it would be Nvidia which actually has revenues and profits now or Qualcomm which is in a very good position to benefit as generative AI starts to be implemented at the edge.
• I already own Qualcomm which remains reasonably valued and has further upside from its position in automotive as well as the potential to take share from Intel and AMD in laptop processors.