What Does an AI Business Model Look Like?

By Gejsi @ Adobe Stock

With massive investment being injected into AI startups with no real business, the question that must be answered is, what does an AI business model look like? Berber Jin reports in The Wall Street Journal:

Artificial intelligence startup Imbue has hoodies branded with its circular orange logo, an office in the heart of San Francisco and marquee investors who lavished the company with more than $210 million.

Work and life blend together for its few dozen employees, who share their emotions with one another at a weekly event called “Feelings Friday” to build trust and connection.

More than two years into its founding, what the startup doesn’t have is a business—or a product that could create one.

Despite a broad downturn in the startup sector, investors chasing the stock market successes of Nvidia and Microsoft have deluged AI upstarts with record levels of funding, minting dozens of companies with billion-dollar valuations in the past year. The investment frenzy is already fueling concerns of a bubble as startups struggle to translate the hype into revenue.

“Everyone believes that AI is the future, so we are going to see an extraordinary amount of investment until proven otherwise,” said Alex Clayton, a general partner at the venture firm Meritech. “The problem is that we don’t know what these business models are going to look like at scale. You can have theories about it, but you really don’t know.”

Fears of rising startup valuations aren’t new in Silicon Valley. But the AI gold rush is notable because investors are writing massive checks—sometimes in the hundreds of millions of dollars—just to get these companies off the ground. Even during the peak of the startup boom, such large financings were reserved for later-stage private companies gearing up for aggressive growth.

Imbue hit a valuation of more than $1 billion with its fundraising last year, courting backers like Nvidia and ex-Google CEO Eric Schmidt. Chief Executive Kanjun Qiu dazzled investors with a vision to build intelligent computers that could give humans the “freedom, dignity, and agency to do the things we love.” Last November, she lavished her employees with a company off-site to Japan.

Imbue is plowing its cash into developing AI models that it hopes will one day create autonomous AI agents. A company spokesperson said it made a “deliberate strategic decision” not to commercialize in order to focus on research and that investors were on board with this approach.

Unlike traditional software companies, the language models underpinning generative AI apps like conversational chatbots are expensive to build. Training them requires data centers with electricity needs so intense that industry leaders are warning that power grids won’t be able to keep up with the demand.

Last year, investors poured $21.8 billion into generative AI deals, up fivefold from the prior year, according to the research firm CB Insights. The average round size for those deals was $51 million, compared with the industry average of $8 million. Tech giants including Microsoft and Amazon contributed to the upswell in funding—with the added benefit of seeing their investments flow back to them through cloud-computing contracts.

Venture capitalists are betting that some of these startups will be the pioneers in a tech revolution that could outshine even the birth of the Internet. They point to the meteoric rise of OpenAI, whose chatbot ChatGPT became the fastest-growing consumer app in Internet history. OpenAI went from zero to more than $1 billion in revenue last year, a brisk growth rate even by the breakneck standards of Silicon Valley.

So far, few other startups with similarly large ambitions have been able to replicate that success.

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