In an episode of the "Invest Like The Best" podcast published on Tuesday, Jay Hoag, the co-founder of TCV, has criticized the "blind rush" towards artificial intelligence (AI) investments by venture capital firms. He likened the behavior to "seven-year-olds playing soccer," where the ball goes over to one side and everyone follows.
Hoag expressed concern about the "enormous" sums poured into startups during the 2020-2021 tech boom, stating that he worries about some of that capital being "broken capital" that will not yield returns. He also noted that the hyperfocus on AI and software as a service is diverting attention and capital away from other viable sectors, especially consumer internet, which he believes still has untapped potential.
According to PitchBook data, in the first quarter of this year, more than half of VCs' investments went to AI and machine learning startups. Last year, global investments in the sector totaled $131.5 billion, up more than 50% from 2023. However, Hoag is not the only investor sounding the alarm bells. MIT economist Daron Acemoglu told Bloomberg in an interview last year that the hype surrounding AI may not meet its lofty expectations, stating that "a lot of money is going to get wasted." Vinod Khosla, a veteran VC, also said in 2023 that most startups were overvalued and that most investments in AI "will lose money."
Despite the hype and the large amounts of capital being poured into AI startups, Hoag remains optimistic about the potential for new consumer internet businesses to be founded and built over the next 10 or 20 years. He expressed a wish that the AI enthusiasm hadn't distracted everyone from other viable investment opportunities.
Hoag has spent over four decades in tech investment and has a track record of backing some of Silicon Valley's biggest wins, including Netflix, Expedia, Peloton, Spotify, and Zillow. He currently chairs TCV's investment committee.
In conclusion, while AI investments may be a hot topic in the tech industry, it is important to remember that not all investments are created equal. Venture capitalists like Hoag are urging investors to be cautious and to not get caught up in the hype surrounding AI. Instead, they are encouraging investors to look at other viable sectors and to focus on long-term potential rather than short-term gains.
