Billion Is The New Cent In AI

I was at the Y Combinator Demo Day recently, talking with another investor in Silicon Valley about an early-stage startup that had just raised seed funding. Needless to say, it was an artificial intelligence company. As we discussed the financing round, I inadvertently remarked that the startup had been valued at “a few billion dollars.” I immediately corrected my slip of the tongue, since I meant “a few million dollars” instead. But what stayed with me was not simply that I had misspoken but the fact that the word “billion” had blurted out of my mouth. Then, I realized that somewhere along the AI run-up, the word “billion” had crept into my intuitive dictionary and cemented itself in my mind. We hear the word so frequently in the AI financing rounds that it doesn’t surprise us anymore.

A billion dollars is still an enormous amount of money. But psychologically, our unit of measurement has intuitively evolved. A decade ago, reaching a one billion valuation was such a rare accomplishment that Silicon Valley created a special word for it: unicorn. Today, for some AI companies, a billion-dollar valuation is the starting point.

Betting On Reputation

The Reversal of Funding Sequence

The traditional startup journey in the pre-AI era followed the sequence of product and customers first before attaining a high valuation. But in parts of the AI sector, the sequence now begins with a large valuation followed by product and (hopefully) revenue. I feel nervous adding the word ‘hopefully’ because not all highly valued startups may reach the revenue level needed in time to justify and sustain the lofty valuation.

That does not necessarily mean that investors have become irrational. It means they believe the upside has become so large, given an infinite AI market size and the scarce exceptional technical talent, that waiting for traditional proof may mean investing too late. So, there is logic to that approach.