The economics of AI are terrible. The exact inverse of what VCs normally say they strive for.

It’s capital intensive, doesn’t easily scale without linear costs, is basically a commodity, seemingly has negative cashflow forever, and customers aren’t willing to pay what it actually costs. It’s basically the worst tech business model and yet somehow VCs caught a spell and threw every available penny into the fire.

Watching this all unravel is going to be interesting.

▲

nba456_ an hour ago | parent | next [-]

Keep dreaming. AI is absolutely booming!

	▲	bryanlarsen 7 minutes ago \| parent [-]
		You both can be right, and probably are. AI becoming a commodity means it will be cheap and widely used. Providers will be highly profitable because of the volumes, but not profitable enough to support multi-trillion valuations.

▲

Kinrany an hour ago | parent | prev | next [-]

Once the models are good enough, the companies can stop selling access to models and start directly competing with the rest of the economy.

	▲	packetlost 22 minutes ago \| parent [-]
		> Once the models are good enough That's a big "if". Even for coding these things are not ready to take away real decision making and it's not clear they will ever get there.

▲

slowmovintarget 9 minutes ago | parent | prev | next [-]

I suspect this one wasn't the "economics of AI" though. This one was bait and switch (intentional or not). They generated a huge user base, then clamped down on many of the things that drew the user base to them in the first place, then acted surprised when those users left because they couldn't get what they wanted there.

And yes, I'm talking about the landslide of NSFW stuff that had to be culled to turn it into an acquisition-friendly target.

Don't have data... I'm guessing.

▲

ProblemExplorer an hour ago | parent | prev | next [-]

> It’s capital intensive, doesn’t easily scale without linear costs, is basically a commodity, and customers aren’t willing to pay what it actually costs

What are some VC funded companies that come to mind that do not fit this profile?

▲

cmiles8 an hour ago | parent | next [-]

Literally any software company, which is what VCs loved for 20 years.

▲

glenngillen an hour ago | parent [-]

Yeah, which IMO is actually the problem. They got so addicted to the sugar hit of SaaS they lost their way. The game change, the risk profile dropped drastically, but they kept their own economics and upside the same and made an absolute fortune.

The type of investment called out by the start of this thread sounds exactly like the type of speculative "we don't even know if this is technically possible, much less if there's even a market for it" that Silicon Valley was founded on.

▲

ProblemExplorer 32 minutes ago | parent [-]

> speculative "we don't even know if this is technically possible, much less if there's even a market for it" that Silicon Valley was founded on

yes and that's the entire point of Silicon Valley.

It's also why you can't have another Silicon Valley in Europe or Asia where almost no one is willing to suspend belief and reality like this.

I've been invited to meetings and conferences from places in Sweden, Amsterdam to Thailand, and investors in all of those places balk at the kind of mindset you need to invest in startups. They are more comfortable with loans than investing. They lose confidence faster or require a higher ROI than would make sense. SV is really special and the reason why the best talent from all the over the world gather there.

VCs become rich not because they are smarter and better than Warren Buffet but because they are willing to place bets that Buffet would never take on.

	▲	cmiles8 17 minutes ago \| parent [-]
		You’re right, but your argument also has a lot of survivorship bias in it. There are rich VCs. There are also VCs that lose their shirts making bad bets. You just don’t hear about those as much.

▲

sarky-litso an hour ago | parent | prev [-]

any SAS company 4 years ago

▲

ProblemExplorer an hour ago | parent [-]

Is Uber a SAAS? Palantir? AirBnB? Netflix? Amazon/AWS?

▲

cmiles8 an hour ago | parent | next [-]

If Uber operated like most AI startups its business model would be to buy new cars every 6 months, sign agreements with every automaker to buy every car they make for the next 5 years despite having neither the cash nor cash flow to pay for that, and sell rides for a fraction of what all this costs them. All while providing a service only moderately better than the boring taxi service that costs the same price and that taxi service just released an app to hail rides. It would then claim it’s worth 100x the valuation of the taxi service.

▲

ProblemExplorer an hour ago | parent [-]

> If Uber operated like most AI startups its business model would be to buy new cars every 6 months, sign agreements with every automaker to buy every car they make for the next 5 years, and sell rides for a fraction of what all this costs them. All while providing a service only moderately better than the boring taxi service that costs the same price and that taxi service just released an app to hail rides. It would then claim it’s worth 100x the valuation of the taxi service.

Uber and Lyft literally "sell rides for a fraction of what all this costs them" upto early 2025. I don't know how old you are but I started to use them back in 2012. I was one of their early users when you could sit next to the driver. From then upto 2025, Uber and Lyft used to literally cost me less than what just gas would cost me to drive the same distance.

This is true too: "It would then claim it’s worth 100x the valuation of the taxi service" - there was literally a website (might be up even now) that literally made this argument and why Uber was doomed to fail anytime now.

Your first two points are also true for Uber Lease - a product that was rolled out for drivers - they could choose to lease specific models and Uber in turn signed agreements with specific automakers. An exact parallel for these points, esp. the circular financing is hard to make because they are not even the same product but I imagine one would agree, on the whole, we are in the conception stage of LLMs and this industry is brand new and figuring things out.

This same pattern had happened when PCs were becoming mainstream. That was 40 years ago so memory of it might be faint or lost. Also VCs weren't really a huge deal back then either but the fundamentals were the same.

We are all overreacting over a nascent industry, upset that it's increasing prices for everyone and pushing humans out of jobs. This is understandable but the conclusion is wrong. We are letting emotions drive decisions.

▲

cmiles8 an hour ago | parent [-]

You make some valid points, but the bigger fact remains that Uber survived because its model was not capital intensive. Yes it burned cash for a while but on one-off costs like setting up new markets. Had it signed contracts to be buying new cars every 6 months in the way AI startups have committed to future expenses it would have gone bankrupt.

	▲	ProblemExplorer 29 minutes ago \| parent [-]
		> that Uber survived because its model was not capital intensive. Yes it burned cash for a while I would say you are either very young or unfamiliar with Uber as a business. Uber was and continues to be extremely capital intensive and you need to qualify your "while". Uber burned cash for 14 years. The one argument I can agree with is Uber didn't burn as much cash as Anthropic or OpenAI does but they are very different businesses with very different impact on humanity.

▲

kridsdale1 an hour ago | parent | prev [-]

Yes?

	▲	ProblemExplorer an hour ago \| parent [-]
		OK and which of the companies that I listed above do not fit the profile below and specifically which portions: > It’s capital intensive, doesn’t easily scale without linear costs, is basically a commodity, and customers aren’t willing to pay what it actually costs

▲

LarsDu88 an hour ago | parent | prev | next [-]

I think the closest analogy we have of the AI boom is the mid 90s browser wars.

First all the money went into the browsers like Netscape. Then the browser got commoditized, but that didn't mean the value went away. A better business model came along, and lo and behold, the Chrome browser went open source. The browser became free, and the scale of adoption meant a lot of value could still be extracted.

A free browser product didn't mean the value of Chrome went away. Rather the opposite. It's a gateway for buying stuff through Google search.

Marc Andressen was the "Mosaic browser" guy before he was the investor guy, so the folks in the early days did not lose all their money. Quite the opposite. Many are now billionaire oligarchs.

LLMs will likely go the way of the browser... commoditized, then free, then appropriated to shove ads into your face. I predict a lot of safety and interpretability research will be leveraged to one day push ads, just like "Golden Gate Claude" could be manipulated to think of itself as the Golden Gate Bridge.

	▲	ProblemExplorer an hour ago \| parent \| next [-]
		> I think the closest analogy we have of the AI boom is the mid 90s browser wars. Depends on how old you are. This analogy makes sense if you were a teenager in the mid 90s. I am older than that so to me, this same pattern had happened when PCs were becoming mainstream. That was 40 years ago so memory of it might be faint or lost. Also VCs weren't really a huge deal back then either but the fundamentals were the same. We are all overreacting over a nascent industry, upset that it's increasing prices for everyone and pushing humans out of jobs. This is understandable but the conclusion is wrong. We are letting emotions drive decisions.
	▲	cmiles8 an hour ago \| parent \| prev [-]
		On the models yes. All indications are models will basically be a free commodity soon. On the datacenter side the closest analogy is the fiber buildout of the .com bust. While that fiber ended up being useful decades later it’s unclear what value a bunch of half-completed datacenters will bring if their owners go bust.

▲

thaumasiotes an hour ago | parent | prev [-]

> and yet somehow VCs caught a spell

Am I understanding this correctly as an idiomatic reference to an enchantment or curse? If so, I'd be interested to know where the expression "catching a spell" comes from.

(I'm really interested in the phrasing and I hope you don't take this the wrong way. For me personally, the metaphorical idea that someone with inexplicable behavior has been bewitched is a normal thing to express, but I'd be more likely to say they "fell under" a spell than that they "caught" it. I believe in Mandarin the usual idiom uses 中 "be struck [by a projectile]".)

	▲	cmiles8 an hour ago \| parent [-]
		FOMO