The AI revolution is on -- and so are the risks inherent in investing in new technologies.
This year has seen the start of a race between Big Tech and startups to quickly develop commercial applications linked to artificial intelligence, which supporters say will change everything.
AI is already in our daily lives in the form of Siri (Apple), Alexa (Amazon), medical devices (scanners), and cars (driver-assistance systems).
But the general public has really become aware of the progress of this technology after the unveiling of ChatGPT, a chatbot developed by the OpenAI startup in which Microsoft (MSFT) has invested more than $10 billion.
ChatGPT has made Alphabet's (GOOGL) Google search appear out of date and heralds a new era for deriving information from the internet. ChatGPT is designed to give users customized results for their queries and friendlier interactions with the search engine.
But beyond this standard evolution of AI, says Ken Smythe, founder and chief executive of Next Round Capital Partners, the New York venture-capital firm, the technology will transform all industries, making them more productive while reducing costs.
Next Round Capital Partners invests in technology and AI startups. The firm has invested in Uniphore, a conversational-AI startup that develops virtual customer-service agents for call centers.
Smythe expects, however, 85% of AI startups to be out of business in three years, either because they were swallowed up by big companies or simply because they ran out of cash. Smythe spoke with TheStreet; the remarks were edited for clarity.
What are the main differences between the dot.com era and the beginning of the AI revolution?
Smythe: The main differences are that this is sort of new in terms of how it's going to replace everyday tasks that we already do as humans. ... whereas dot.com was only going to enable you to do things easier, like shopping online and doing transactions online, etc. [This] is going to completely displace entire industries, [whereas] dot.com was just sort of like a way for us to interact on the internet and add to our life.
This is going to replace many aspects of the current things that we interact with. So it's a much more quantum leap in terms of advancement than dot.com.
I was watching a YouTube video the other day about Boston Robotics. We're going be replacing construction workers with robots that can work 24 hours a day. So I think AI is going to be a massive shift in terms of how we operate as a society.
So AI is here to stay and will take us to the next level?
Smythe: Exactly, yes. It's gonna take some bumping around and ... there's gonna be a lot of mistakes made and there's gonna be a lot of implementations that don't work. But at the end of the day, there's real staying power because it's going to make everyone's lives that much more efficient, and it's going to ... cut massive costs. [Companies are] gonna be able to really become much more efficient.
What should investors think about before investing in an AI startup?
Smythe: Honestly, the problem for investors right now is that if you're just a straight sort of financial investor, and you're looking at traditional metrics, those don't exist.
These companies don't have enough of a commercial track record [for investors] to even look at a financial statement. So you're going to be really focused on ... what is the track record of that person developing this similar technology within another organization and being successful?
You start breaking it down: [What] are the industrial applications? Are you AI for self-driving cars? Are you AI for marketing? Are you AI for medicine?
For example, yesterday I got approached by an AI startup with a guy that's one of the co-founders of Siri for Apple (AAPL). [Siri is AI. Alexa (AMZN) is AI. We're] already interacting with AI in our everyday lives. [Now,] it's just been expanded into every other commercial aspect of our lives.
[From] a diligence perspective, it's really the track record of the person and the technology they've been able to develop. And then from a business perspective, can they commercialize it, and can they actually make money from it?
How do investors make money?
Smythe: The real power of AI is how it's going to transform all these various industries and make [them] a lot more efficient and a lot more innovative, [That's] because right now, the limitations [have been] the human mind can only process so many things and technology can only process so many things. So artificial intelligence is allowing us to sort of leapfrog a lot of those limitations.
There's going to be an Amazon -- but for every Amazon there's gonna be all these other e-commerce companies that have been extremely successful along the way. Then you had Etsy (ETSY) for arts and crafts, and then you had Dick's Sporting Goods (DKS). You had everybody that was like a subset. So I think that's what's going to happen.
Anything with AI in it right now is zooming in the public market, zooming in the private markets. But where investors are going to make money is as AI specializes and really becomes valuable to each of those industry verticals. That's when you can start charging a lot of money for it.
Do you expect most of the AI companies today to be around in the next two or three years?
Smythe: I would say a lot of the startups today, 85% of them, will be out of business in three years. They will run out of funding. The big incumbents are going to outspend them. So Google, Open AI/Microsoft (MSFT), Facebook (META), Amazon will have hundreds of billions collectively to spend on AI development, whereas if you're a startup in AI, you're going to consume a lot of capital. [Are] you really able to keep up and have enough scientists and PhDs to be able to develop innovative code that's going to be commercially viable, versus a lot of these bigger companies that are going to just crush you?
If you have to pick early AI winners ...
Smythe: I think your early winners are the AI startups that are teaming up with the big incumbents to have capital, to have resources, to have manpower, to have skill knowledge. Those are the big winners. I think the stand-alone [for] an investor to bet on, ... to put $10 million into a startup that just launched, they're just gonna have a hard time competing.
If you're a venture capital investor, [are] you willing to put $200 million into a startup that has no revenues, that could be completely outdated in 12 months? That's the risk as an investor, [that] the guy may come out of the best training program ... but more than likely he's gonna get edged out every day by the big guys.
How do you value an AI startup?
Smythe: It's very difficult to value these things. ... It's so new, people don't know how to value them right now.
