Why OpenAI's $157B valuation misreads AI's future, according to Foundation Capital.

"OpenAI's growth has been nothing short of meteoric. Monthly revenue reached $300M in August 2023, a 1,700% increase from January. 10M users pay $20/month for ChatGPT, and the company projects $11.6B in revenue next year."

"This narrative collides with a stubborn reality: the economics of AI don't work like traditional software. OpenAI is currently valued at 13.5x forward revenue -- similar to what Facebook commanded at its IPO. But while Facebook's costs decreased as it scaled, OpenAI's costs are growing in lockstep with its revenue, and sometimes faster."

"In traditional software, increasing scale leads to improving economics. A typical software company might spend heavily on development upfront, but each additional user costs almost nothing to serve. Fixed costs are spread across a growing revenue base, creating the enviable margins that make today's tech giants among the most profitable businesses in history."

"Generative AI plays by different rules. Each query to a model costs money in compute resources, while each new model requires massive investments in training. OpenAI expects to lose $5B this year on $3.7B in revenue."

Why OpenAI's $157B valuation misreads AI's future

#solidstatelife #ai #aieconomics

"The grimy residue of the AI bubble." "What kind of residue will the AI bubble's popping leave behind?"

So economic 'bubbles' leave a 'residue' when they pop?

"According to Pitchbook data, venture capitalists put $27.1 billion into AI in the quarter -- half of all VC investment for the time period. But the past few weeks have shown more and more organizations doubting the value of AI. The hype is starting to subside, it appears."

"Doctorow thinks that the residue of the bubble popping will be minimal -- large models will no longer be cost-effective to train, but small open-source models will remain, adept for smaller, better scoped tasks."

"But I'm more pessimistic -- and frankly upset -- about what will be left behind once the AI bubble pops. Already, Google and Microsoft have sheepishly admitted that they are far from reaching their climate goals, due to the large investment in AI."

"It's not just the material infrastructure and the climate catastrophe, but the careers and industries which have been upset. Visual and conceptual artists have discussed how their work has all but dried up." "After the AI bubble bursts, where do these careers go?"

#solidstatelife #ai #aieconomics #aihype

https://buttondown.email/maiht3k/archive/the-grimy-residue-of-the-ai-bubble/