FT: ‘Of course it’s a bubble’: AI start-up valuations soar in investor frenzy

Key points:AI start-up valuations surged nearly $1tn, fueling bubble concerns.VCs pour record $200bn into AI, driven by hype and FOMO.Investors warn of unrealistic valuations and looming market risks..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By George Hammond in San Francisco.Ten lossmaking artificial intelligence start-ups have gained close to $1tn in valuation over the past 12 months, an unprecedented increase that adds to fears about an inflating bubble in private markets that could spill over into the wider economy.OpenAI, Anthropic and Elon Musk’s xAI have seen their values marked up repeatedly over the past year amid a rush to back young AI companies. Smaller groups building AI applications have also surged, while established start-ups including Databricks have soared after embracing the technology. US venture capitalists have splashed $161bn over the year to date on a technology whose promise has not yet been matched by major economic gains. That equates to two-thirds of their total spend, according to PitchBook.The bulk of investment has been funnelled to just 10 AI groups — Perplexity, Anysphere, Scale AI, Safe Superintelligence, Thinking Machines Lab, Figure AI, Databricks, as well as OpenAI, Anthropic and xAI. That has pushed up their combined valuations by almost $1tn, according to FT calculations..Read more:. AI-fueled stock surge sparks dotcom bubble fears.“Of course there’s a bubble,” said Hemant Taneja, chief executive of venture capital firm General Catalyst, which raised an $8bn fund last year and has backed Anthropic and Mistral. “Bubbles are good. Bubbles align capital and talent in a new trend, and that creates some carnage but it also creates enduring, new businesses that change the world.”.Tech has endured boom and bust cycles. The dotcom crash in 2000 decimated a generation of internet companies, and VCs are still picking through the debris left after a software investment frenzy stoked by low interest rates came to a juddering halt in 2022.But the current scale of investment is of a different magnitude. VCs invested $10.5bn into internet companies in 2000, roughly $20bn adjusted for inflation. In all of 2021, they put $135bn into software-as-a-service start-ups, according to PitchBook. VCs are on course to spend well over $200bn on AI companies this year.“We have gone from the doldrums to animal spirits in a few months,” said an executive at one US investment firm. “It’s FOMO.”Investors are bullish the technology will open multiple new multitrillion-dollar markets, from automated software engineering to AI companionship. AI is a technology which “adds a zero to everything”, says Sameer Dholakia, an investor at Bessemer Venture Partners..But there are concerns that indiscriminate spending has made valuations unrealistic. Start-ups with around $5mn in annual recurring revenue, a metric used by fast-growing young businesses to provide a snapshot of their earnings, are seeking valuations of more than $500mn, according to a senior Silicon Valley venture capitalist. Valuing nascent businesses at 100 times their earnings or more dwarfs the excesses of 2021, he added: “Even during peak ZIRP [zero-interest rate policies], these would have been $250mn-$300mn valuations.” “The market is investing as if all these companies are outliers. That’s generally not the way it works out,” he said.VCs typically expect to lose money on most of their bets, but see one or two pay the rest off many times over. “There will be casualties. Just like there always will be, just like there always is in the tech industry,” said Marc Benioff, co-founder and chief executive of Salesforce, which has invested heavily in AI.He estimates $1tn of investment on AI might be wasted, but that the technology will ultimately yield 10 times that in new value. “The only way we know how to build great technology is to throw as much against the wall as possible, see what sticks, and then focus on the winners,” he added. .Sam Altman, OpenAI’s chief, has also argued its effort to build artificial general intelligence, or AGI — capable of matching humans across all economically valuable tasks — will create huge benefits, even if some capital is misallocated on the way.“It could be analogous to internet 1.0,” said Lucas Swisher, a partner at Coatue who has backed OpenAI, Databricks and SpaceX. “Then, a few companies like Google and Meta grew extremely quickly and ended up owning the vast majority of their markets.”He added: “In this wave we are seeing that only a few companies matter, they are black holes, everything else gets sucked in. But it might be 15 companies this time rather than five.”Meanwhile, the increasing influence private start-ups such as OpenAI have on the public markets has created a greater risk of contagion should their bets fail..Read more:.The Economist: AI startups soar on hype, not revenue.Shares in AMD, Nvidia, Broadcom and Oracle gained hundreds of billions after the companies struck deals to deliver computing power to OpenAI in recent weeks. If questions over the lossmaking start-up’s ability to pay are not resolved, those gains could unwind, dragging the market down.Three years after releasing ChatGPT, OpenAI’s revenue is $13bn on an annualised basis, an unheard of growth rate for a start-up.But OpenAI and peers are competing with Meta, Google and others in a hugely capital intensive race to train ever-better models, meaning the path to profitability is also likely to be longer than for previous generations of start-ups.The deals with chipmakers, like VC investment, are a bet that AI demand will continue its stratospheric growth, helped along by research breakthroughs and new products.Sebastian Mallaby, author of about the history of the VC industry, summarised the thinking among investors as “‘if we have AGI this will all be worth it, if we don’t it won’t’.”He added: “It comes down to these articles of faith about Sam’s ability to work it out.”.© 2025 The Financial Times Ltd.

FT: ‘Of course it’s a bubble’: AI start-up valuations soar in investor frenzy

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