Many VCs question whether generative AI startups, currently attracting huge valuations, will make enough money, fearing a repeat of the crypto investment hype
Silicon Valley VCs fearing a repeat of falling crypto values warn against pouring cash into hype-fuelled start-ups
Context & Ripple Effects
This warning lands just months after the crypto collapse that VCs keep invoking, and at the exact moment generative AI became the only bright spot in venture: US funding fell by nearly half overall while generative AI investments rose 65% to $3.3B in Q2 2023 alone. The skepticism is not abstract — it is about whether valuations are being set by revenue or by fear of missing the next platform shift.
First-order effects
- Startups raising at hype-level valuations now face investors demanding a credible path to revenue, and the most disciplined firms move first — SoftBank's Vision Funds co-CEO Alex Clavel said the firm was 'looking very carefully' at generative AI before committing, signaling that even mega-funds will slow-walk deals rather than chase rounds.
Second-order effects
- Capital polarizes: AI absorbs a rising share of total VC dollars — reaching $64.1B, roughly 30% of all venture investment, by 2024 — squeezing non-AI founders harder in a downturn that AI has not reversed, and pushing some AI startups toward gimmicks like back-to-back and multitiered rounds that inflate headline valuations.
Third-order effects
- If the pattern holds, venture re-runs its crypto playbook in slow motion: a hype-funded cohort reprices sharply when revenue fails to justify marks, diligence standards tighten across the board, and the industry concentrates further around a handful of AI names that can still raise — with figures like Demis Hassabis already warning that the money surge itself is distorting research priorities.
The trend: Venture capital keeps concentrating into generative AI faster than it can answer the monetization question, making each funding cycle both bigger and more fragile.