Dear readers,
It is a great pleasure to be back to writing after the summer break as we return to work. Labor Day and the second half of the year are just around the corner.
The debate around GenAI is as heated as before the holidays, with much attention on Nvidia – the poster child of GenAI. In trying to assess whether Nvidia will become a $50 trillion valuation and whether its market cap growth is sustainable, many critics argue that GenAI is overhyped.
Though the GenAI era feels epic, it has been less than two years since Open AI released ChatGPT 3.5, the moment that brought this long-gestating technology to public attention. We are still in the early stages of what promises to be a significant financial opportunity for companies and governments embracing it. The US economy alone could gain almost 9% in productivity gains and 6,1% in GDP over the next decade through GenAI per GS senior global economist Joseph Briggs. Beyond economic opportunities, GenAI is also a transformative force for society, with far-reaching implications in the social and medical fields. Here, it has the potential to bring unprecedented advancements, such as personalized treatments. In yet another domain, GenAI also changes the art of warfare, its technology bracing huge geopolitical implications.
This is why I argue in my latest Op-Ed that GenAI goes beyond disruption and is instead a discontinuity. It marks the beginning of a more profound and far-reaching transformation than many leaders have fully grasped. It will unfold over a longer timeframe than investors and entrepreneurs are used to, which necessitates adopting a multi-timeframe perspective in investments, and in a way that is not linear: embracing GenAI is not a plus or minus game; it is about taking a leap hindering a new economic order between winners and losers. The result and form of that leap are yet to be determined. Instead of obsessing about the daily moves of Nvidia's stock price, now is the time to take a step back and try to understand this monumental sea change that is GenAI!
So far, most of the funding for the GenAI tech stack by venture capital investors and the hyper-scalers has been directed towards financing the foundational models behind the new technology. Innovation is ongoing in this area, with Meta recently announcing work on Llama 4, which is expected to be 100 times more powerful than Llama 3 (!). At the other end of the spectrum, there is considerable innovation in smaller, open-source models now seen as a more economic and sustainable choice for many enterprise use cases. There has also been significant venture capital financing for enterprise and consumer-facing applications in the fields of customer support chatbots, productivity tools for employees, and content creation, to name a few promising use cases.
Whether it’s GenAI native applications, existing SaaS start-ups, or SaaS incumbents integrating GenAI features and products, we are still in the "adoption" phase and have not reached the "monetization" phase yet. It is still too early to expect widespread monetization. Investors should focus on whether customers are genuinely adopting these features/products and how monetization is already evidenced for those "power users" of these features/products. Public market investors will need more patience before software companies truly demonstrate growth from the technology, but they can already start disinvesting from those companies that, by all evidence, will not be able to ride the wave.
This resilience to GenAI should significantly impact company valuations, both for venture-backed and private equity-backed companies, as we gear up for the next wave of exits. The exit problem has been a major challenge for both VC and PE firms. With an IPO market largely closed, except for high-growth SaaS companies like Klaviyo and Rubrik, there is an estimated 731 unicorns worth a total of $2.4 trillion waiting to achieve some kind of liquidity. In this context, articulating a clear blueprint on how GenAI will positively influence a company's earnings (even in the long-term) will help sustain valuations that will likely reflect a strong markdown compared to the current values in private market investors' books. Recent valuations of companies like Revolut, Ramp or Stripe remain an exception and are linked to these companies' successful pursuit of high growth at scale in a challenging growth environment. The combination of high growth, a qualitative one, and a clear GenAI blueprint will sustain high valuations in the next months. Both can and should be objectively evaluated.
As we enter the year's second half, there are many reasons to be optimistic. Let's ensure we do not get disappointed too quickly due to unrealistic expectations about a technological promise that is just beginning. Introducing rigor in the financial assessment of GenAI companies and the proper guardrails around adopting the technology will allow investors, business leaders, and society to continue to seize this once-in-a-generation opportunity. I reiterate my call for cautious optimism in the first part of the year.
Have a good read!