A New York venture capital firm was recently given the opportunity to invest in Scale AI, a buzzy startup that helps companies label vast quantities of data.
But the firm passed on the deal after learning of the hefty price tag: A $14 billion valuation, twice what Scale AI raised at three years ago. (The valuation was first reported by the Information)
"It seems way too expensive based on the run rate and its 'old school' business model," said an investor at the firm, referring to Scale AI's heavy reliance on low paid human contractors. The investor was not authorized to speak publicly.
It's just one sign of the AI gold rush taking over Silicon Valley. The unexpected explosion of generative AI last year left some venture investors flat-footed, scrambling to deploy capital and secure a piece of the AI revolution. But with every startup suddenly adding ".ai" to its name, every Fortune 500 CIO launching an "AI initiative", and with giants like Microsoft and Amazon pouring billions into the sector, some investors tell Business Insider they're finding it difficult to find any AI deals that make sense.
"Everyone's desperate to have an AI portfolio, and everyone's willing to overpay, they're just like throwing dollars at shit they don't understand," said another Bay Area-based VC. He says these days having a PhD from Stanford or a stint at OpenAI on a founder's resume can be enough to attract venture dollars.
"I met somebody that was raising $100 million dollars with a deck, in fact, they didn't even have a deck, they didn't even know what they were gonna do, but they were from OpenAI," the VC said.
Even as valuations have stagnated in other sectors, AI continues to boom as more and more capital chases fewer and fewer opportunities.
"When you're a founder right now in the AI space, you just get money shoved at you," said a different investor at a Bay Area-based VC firm. "Any company with sort of a halfway decent story will get, like, five or ten term sheets," the VC said. They mentioned one company that received more than 80 unsolicited offers from VCs while still gearing up for their Series A.
Some investors have responded by backing companies at earlier and earlier stages.
"But I'm starting to see that strategy not work as well anymore," said the VC of investing at the seed stage. "I'm seeing some seed rounds, particularly when it comes to foundation models, get done at, like, $200 million plus valuation. Perhaps the outcomes will be larger than anyone could imagine, that's what everyone is telling themselves in order to justify that."
For many tech investors though, the pressure to do something, anything, in AI can be overwhelming.
"You have to deploy capital, right? So you have to be like, rah, rah, rah," said another Bay Area VC at a large VC firm. "I can't go to LPs and say I'm not doing deals, all LPs want to hear about is your AI investing," the VC said.
"You feel like your job is to get deals done," said one investor, "when you're not doing deals, people may start ask you what the fuck you're doing."
Most investors in Silicon Valley agree that AI will be a transformative technological shift, with some comparing it to the mobile revolution of the early 2000s or the mass adoption of the internet.
"I believe in it," said the Bay Area-based investor at the large firm, "but where can we make money as VCs? That's a hard question."
