Not an AI unicorn in 2024? Then this party is not for you
Once a year the US venture firm Coatue hosts a very exclusive investor conference in California. Bill Gurley and Brad Gerstner from BG2 podcast were guests and contemplated the state of AI investing
Is everyone going crAIzy?
Once a year the leading US investor Coatue hosts an exclusive investor conference in California. Bill Gurley and Brad Gerstner, two seasoned Silicon Valley investors, shared their insights in their recent BG2 podcast.1 Here is the summary:
At the conference the hosts looked addressed one question: are we in an AI bubble?
They started with a temperature check on the US public markets, beginning with Nvidia (who else?).
In 2024 the S&P500 total return breakdown was the following:
Nvidia contributed 5%, the Magnificent Seven 5% and 4% by the other 493 US companies (!). The stock market Rallye created 3 three trillion companies (Nvidia, Microsoft and Apple).
Looking at Nvidia’s earnings multiples, Coatue’s verdict was simple:
“Nvidia is not expensive on an earnings basis.”
This is due to the fact that the massive earnings growth matched Nvidia’s meteoric 10x share price rise, keeping things balanced.
Coatue’s final verdict on the current AI craze was simple:
We are not an AI bubble and AI will become even bigger than we currently expect!
According to Bill and Brad, every investor and founder at the conference felt like a kid in a candy store. Apparently, the vast majority of US investors believe in the AI mega wave. At the same time the width of opinions between true believers and critics on AI is very wide (just listen to Yann Lecun from AI Meta).[1]
As seasoned and battle-worn Silicon Valley investors, both Bill and Brad do not rule out another AI winter as technologies always develop in waves. However, this will not diminish the longer-term impact.
USD 1.8 trillion of required AI returns
In 2024 US big tech is planning to invest USD 200bn into AI infrastructure (as capex). This is unprecedented and begets the question, how this will ever create a payback for investors?
At the conference two complementary theories were presented by Coatue and Microsoft. First, Coatue calculated USD 1.8 trillion in revenue is required to return 25% on invested capital. This could be achieved by laying of 5% of the labor force due to AI automation. Ouch.
Satya Nadella of Microsoft proposed another calculation. If AI elevates the global GDP from currently a 1-2% to a 2-3% growth, this would pay of the incremental spend on AI.
How exactly this will happen is currently anyone’s guess as large corporations are in an experimental stage, conducing pilots and developing business models.
50-70% off your startup valuation
The venture world in the US is still hurting. Coatue showed that in 2024 VC investments, at USD 250bn, are a third of 2021 levels!
To make things worse, most of the VC money today goes into AI:
In 2024 so far 200 AI deals of USD 22bn at USD 1bn average valuation, USD 120m average size were made.
This is a 5-6x the valuation and funding size of non-AI companies. OMG!
Besides of AI unicorns, the other 1,400 unicorns cannot raise any money. Therefore, last round valuations are most likely too high and not adjusted to the new post 2023 reality.
One effect of this is a slowing employee growth at these unicorns.
Even worse, the US IPO market for startups is absolutely dry and even below Great Financial Crisis in 2008.
Without IPOs and no new funding rounds, the best estimate for startup valuations are secondary share sales. According to Coatue secondary sales of US startup shares happen at the exact same multiple as public market companies (aka much lower than previous multiples).
This results in sales 50-75% lower than the last funding round! OUCH!
AI chatbot for AI investors inquiries
In summary, if you are an AI startup you are literally the kid in a candy shop. I have recently talked to several Swiss AI startup founders and who all are swamped by investor requests.
(One founder even built a GenAI chatbot to answer investors calls and emails.)
Even Switzerland receives some of the US investor money: Swiss AI legaltech startup DeepJudge received a USD 10.7m seed round by Coatue.[2]
America’s brute force approach to AI is truly bedazzling! It is hard to separate truth from vision and staged demo from real-life use case.
It is best not to forget Warren Buffett’s famous quote for investors:
Only when the tide goes out do you discover who's been swimming naked.
[2] https://www.baerkarrer.ch/en/news/bar-and-karrer-advises-coatue-in-usd-107m-seed-round-of-deepjudge