Why most ChatGPT startups will likely fail – and what to do about it

The words on every investor’s lips right now are ‘generative AI’. What we’re witnessing today is undoubtedly a watershed moment in technological progression. Since its launch in November 2022, ChatGPT has created a huge buzz - not only among the general public but also in the investment community.

However, let’s just take a moment to adopt a more nuanced perspective on its significance. While it may appear as a groundbreaking advancement in computing and human cognition, it primarily relies on extensive computational resources and a vast dataset. Consequently, the sad reality is that the majority of startups offering ChatGPT-based solutions in the market will likely fail.

Although there are undoubtedly significant opportunities for companies that effectively implement generative AI, it is important for investors to exercise caution when creating hype around this technology. As investors, there is a responsibility to assess the value of companies using generative AI, not only in their own firm and Limited Partners (LPs), but also for startups in the technology industry.

So why do I think most ChatGPT startups will, ultimately, fail?

First, the majority of "ChatGPT startups" lack substantial product innovation. In most cases, they offer a superficial application layer built upon OpenAI, meaning these solutions are unlikely to have long-term viability.

The companies that will reap the greatest rewards are those that invest their time and resources into thoroughly researching how Generative AI and ChatGPT can seamlessly integrate into their current products, to enhance operational processes, customer service, and overall customer experience.

I’ve seen this clearly demonstrated by Krisp, a company specialising in noise-cancellation software for platforms such as Zoom, Google Meets, and Teams. With ChatGPT, Krisp has introduced a virtual meeting assistant that automatically generates meeting notes. What sets Krisp apart is its unique use of on-device transcription, which offers heightened information security and an enhanced customer experience. In this case, the innovation stems from their existing product rather than primarily relying on the language model.

The second reason why I think ChatGPT startups will fail is that the smaller players cannot compete with the likes of Google and Microsoft. Much like we’ve seen with the public cloud landscape, we can anticipate the dominance of a select few players in the infrastructure segment of generative AI, namely Google and Microsoft. It’ll be extremely difficult for an emerging company to challenge these tech giants in developing a generative AI model powerful enough to compete.

Why is that the case? Because, realistically, no smaller player or new company will have the computational resources or billions of dollars required to enter this race. The larger industry players will continue to dominate because they are the only ones that possess the computing power these large language models need.

Why we shouldn’t ‘feed’ the hype

Investors are always eager to identify the next breakthrough. However, before succumbing to excitement, it is crucial to critically evaluate the companies we choose to invest in. Are we motivated by the genuine long-term potential of the company or are we simply caught up in the hype cycle?

I firmly believe that investors have a significant responsibility when evaluating potential investments in generative AI startups. Engaging in a hyped trend poses risks for all parties involved. Investing in startups solely because they leverage ChatGPT, for instance, can artificially inflate their valuations far beyond their actual worth. This detrimental situation hampers the market, disappoints investors and their LPs, and hinders the companies themselves from achieving sustainable, long-term growth that meets investors' expectations.

As a result, valuations will plummet, impulsive investing will tarnish the reputation of investors, and LPs will receive weak returns.

An alternative approach

It may seem that I have a negative or cynical view of ChatGPT and the innovations that stem from the advancements of generative AI. But far from it. I believe that generative AI will bring about a huge revolution in the technology market and present some really exciting opportunities for investors, as well as companies’ customers.

The most exceptional founders will leverage it to augment their existing products, resulting in enhanced user experiences and improved operational efficiencies that will drive further growth and better customer experiences.

Those who successfully achieve this, along with the support of discerning investors, will reap the highest returns.