Everybody Thinks AI Is a Bubble. What If They’re Wrong?

In the following excerpt, Derek talks to Azeem Ahar about the investment marketplace for AI tools and how it compares to the dot-com bubble.

Derek Thompson: Well, you’ve mentioned the housing bubble, the global financial crisis; you’ve mentioned the dot-com bubble. What feels similar this time around, and what feels different?

Azeem Azhar: Well, I lived through both of those, and I remember during the dot-com bubble, somebody broke into my office by climbing up the fire escape to pitch us their business to look for investment. So that is a moment that I hope will not be repeated. During the housing crisis, I had to get to know the face of Angelo Mozilo, who was a CEO of Countrywide Financial—and a subprime lender with a great tan. And for some reason, he was on my TV screen every single day. So these are things I have—

Thompson: For some reason, I still remember his tan. I don’t remember that much visually about the global financial crisis or the housing crash, but I remember that man’s tan, and it was spectacular.

Azhar: It was absolutely spectacular. And unfortunately, the reverse was true of his mortgages. You see these characters, you see these moments. The similarities with the dot-com are that this is being driven by venture capital, by Silicon Valley, by the promise of a new technology that will reinvent the world. We thought we might create a new nation in cyberspace back in 1999.

But what’s really different is that back then, nobody was really using these sites and these services, outside of Yahoo and CNET and eBay. These things were empty. The line was from the Kevin Costner film Field of Dreams: “Build it, and they will come.” And people built these things, and nobody came. I mean, Pets.com spent $150 million to make $600,000 a month in sales. I mean, it was really, really confused.

So I think that’s where the similarity, to some extent, ends, which is that what we are seeing with generative AI is that most of us are using ChatGPT, and many companies are, and there’s billions of dollars being spent. So that feels distinctly different to where we were back in 2000.

Thompson: And this is where it’s confusing for me because I have to admit that I use ChatGPT, I acknowledge that Claude is extraordinary, and some of these gen AI tools are fantastic. And at the same time, I read headlines about Thinking Machines, the AI startup that’s helmed by the former OpenAI executive Mira Murati, which just raised the largest seed round in history, $2 billion in funding at a $10 billion valuation. That company has not released a product; it has not described to investors what product they’re even trying to build.

There was a quote from one investor who met with Murati, who by all accounts seems like an absolutely brilliant woman, and he said, “It was the most absurd pitch meeting. She was like, ‘So we’re doing an AI company with the best AI people, but we can’t answer any questions.’” And so when I look at this, I have to admit, this does somewhat remind me of a dot-com company that has vast promises for reshaping some aspect of retail, but very little underlying business that people can see. Or maybe some housing development that’s built in the exurbs of God knows what, Phoenix; it’s beautiful and perfectly financed, at least on the outside, and yet no one is moving into the houses.

So to what extent do stories like this at least give you the tiniest little bit of a Spidey sense that like, “Wow, there is a lot of frothy expectation and funding going toward very expensive projects right now, with no clear proof that they’re going to actually throw off revenue?”

Azhar: Well, I think Thinking Machines is a really great example. I felt my Spidey sense tingle as well. It’s really just a hard thing to piece together. No business plan, no product, and that kind of valuation. But those things happen in the private venture capital market from time to time, and they don’t really spill over in the real world. I mean, three years ago, venture capital fundraising, the prices investors were willing to pay was really, really crazy. That stopped. Prices normalized. They’re getting expensive now. And, well, that does feel like it’s heading towards that moment of bubbledom, if that’s the right word.

But the other side of that is even these startups are growing like absolute topsy. We’ve just heard that Cursor, which makes a tool to automate coding, has reached a few hundred million dollars of revenue, and this company’s only three years old. I invested in an email tool that uses AI to help you answer your emails, and I remember being really cross with the founders when I looked at their pitch, where they said, “We’ll get to $10 million in revenues in the first year.” And I was saying, “That’s just ridiculous. That’s not going to happen. And this is the thing that I don’t like about your pitch.” They got to $17 million in revenue after about nine months, and they’re growing faster than ever before because customers want to pay for this.

And we shouldn’t forget that by the end of this year, ChatGPT, that weird experiment that spilled into our lives three years ago, will be making about $10 billion annualized at the end of this year. And again, that’s real money, and that’s money that’s been made faster than Facebook got to that milestone or TikTok got to that milestone. So of course you get these moments of exuberance. But they’re also examples where real customers are spending real money on products that they really like.

This excerpt has been edited and condensed.

Host: Derek Thompson
Guest: Azeem Azhar
Producers: Devon Baroldi and Kaya McMullen