AI Startups Are Already Running Into Some Serious Problems

"A shallow trough of disillusionment."

Red Flags

Less than a year into the AI boom and startups are already grappling with what may become an industry reckoning.

Take Jasper, a buzzy AI startup that raised $125 million for a valuation of $1.5 billion last year — before laying off staff with a gloomy note from its CEO this summer.

Now, in a provocative new story, the Wall Street Journal fleshes out where the cracks are starting to form. Basically, monetizing AI is hard, user interest is leveling off or declining, and running the hardware behind these products is often very expensive — meaning that while the tech does sometimes offer a substantial "wow" factor, its path to a stable business model is looking rockier than ever.

Closed AI

Underlying it all is the OpenAI-shaped elephant in the room. The company's game-changing chatbot's release in November 2022 brought on some major magical thinking on the part of investors who hoped that the burgeoning technology's commercial value "would materialize at light speed," longtime AI investor and partner at the VC firm Index Ventures Mark Goldberg told the WSJ.

Now that wellspring of optimism is coming back to haunt them, as even the OpenAI chatbot's usage seems to be plateauing or even declining. Take Midjourney and Synthesia, two more brand name AI startups where, as the WSJ points out, data from the analytics platform Similarweb shows traction flatlining (the latter, though, raised a cool $90 million in June thanks to backing from Nvidia.)

Adding to their woes, the market is lousy with free offerings — a perfect illustration being ChatGPT — and users have been hesitant to shell out for a paid version.

The Upshot

That's not to say the whole ship is sinking. OpenAI is slated to generate $1 billion in revenue over the next year, offsetting at least some of the staggering cost of running ChatGPT.

But while Google and Microsoft have the resources to lose money for years, and OpenAI has a premier product that went massively viral, it's not clear how much oxygen that's going to leave for the Jaspers of the world.

What's left, as Goldberg put it, is "a shallow trough of disillusionment" in the AI space — and the path forward seems to get murkier by the day.

More on the AI industry: AI's Dirty Secret: Poor People in the Developing World Are Doing Most of the Work