That’s a cause for concern for James Currier, co-founder of the seed-focused venture firm NFX.

Currier said that he had already invested in four generative AI startups before the market heated up, but he has since backed off of additional investments.

Currier

“If you look at other major technological shifts like the internet, mobile or crypto, there [was] a lot of skepticism,” he said. “True believers had an opportunity to create a startup in those areas when others didn’t believe.”

But with generative AI’s usefulness becoming apparent to everyone, Currier said, he’s concerned that hundreds of similar companies that are hard to distinguish from one another could be built.

Not all investors worry that it will be hard to create a differentiated, defensible product in generative AI.

“I think just about every firm already has one investment in this space,” said Oana Olteanu, a partner with SignalFire. Last year, her firm backed Tome, a platform for storytelling design. Olteanu said that she also led SignalFire’s seed investment in an undisclosed pre-product generative AI startup.
Learning from past exuberance

Olteanu said that she believes that foundation models could eventually become a commodity, and most of the value will be realized by the companies that customize the models for specific use cases.

It may be years before it becomes clear what type of companies—incumbents such as Google, startups, or foundation model developers—capture the majority of generative tech’s upside. Meanwhile, some investors say the widespread belief that the VC market was overheated in 2021 is helping them keep a cool head when investing in generative AI.

“I think the [current] market conditions are overriding the typical hype behavior now,” Olteanu said. “I believe many other VC firms, not only us, are very careful and diligent in analyzing the opportunities.”

Currier, who is currently spending all his time on AI opportunities, said investors aren’t paying elevated prices for generative AI seed deals. “In some cases, valuations are lower because the founders are desperate to get going,” he said. “They see how fast everything is happening.”