AI Startups Are Suddenly In Big Trouble

"You can already see the writing on the wall."

Bubble Bubble

As the speculative bubble surrounding AI shows signs of bursting, the startups that banked on the tech — and their financiers — are starting to feel the burn.

As the New York Times reports, AI startups are having major issues as they continue trying to compete with the big boys while experiencing the harsh reality of their enormous costs.

From the makers of the image generator Stable Diffusion to Anthropoic, which was founded by OpenAI exiles, startups are staring down the barrel of their expenses — which in addition to the regular cost of running a tech startup also include the massively expensive compute power required to run large AI models.

"You can already see the writing on the wall," Ali Ghodsi, the CEO of the data storage and analysis company Databricks, told the NYT. "It doesn’t matter how cool it is what you do — does it have business viability?"

Toil and Trouble

Perhaps the biggest issue, as the report suggests, is that investors who spent big on AI hype over the past few years are now seeking returns that have yet to materialize.

As the investment tracker PitchBook told the newspaper, there has been $330 billion poured into roughly 26,000 AI startups over the past three years — a two-thirds increase from the period between 2018 and 2020.

Held up against OpenAI — which is, of course, backed by the tech giant Microsoft — the vast majority of those firms have not made the kinds of industry-shifting advancements investors expect, all while needing to spend more and more on things like infrastructure and compute.

Anthropic is a prime example. According to two insiders who spoke to the NYT anonymously, the startup founded by ex-OpenAIers is spending $2 billion per year while only bringing in between $150 million to $200 million in sales. After bringing in more than $7 billion from companies including Amazon and Google, those figures are looking pretty dire.

And Stability AI, the maker of the image generator Stable Diffusion, has been very publicly sinking. After securing more than $100 million in fundraising in 2022, the company has spent the better part of the last year struggling to pay its bills, and as a wild Fortune expose shows, its bombastic ex-CEO, Emad Mostaque, seems to have been at the heart of its chaos. Since Mostaque's resignation in March, the company behind one of the most popular image generators laid off 10 percent of its staff.

Investors take note: just because something is buzzy doesn't mean it has a pathway to financial viability.

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