The tech boom of the late 1990s, the blockchain boom of 2020 and 2021 and the artificial intelligence boom of 2023 have a lot in common: Game-changing technology, with the potential to change how we work, shop and communicate. Countless startups. Excited founders. Even more excited VCs. Massive investments. With no idea how anything will make money.

“We’re changing the way the world works!” 

“Game-changing. Disruptive.” 

“The world will never be the same!” 

“This changes everything!” 

The enthusiasm of the founders is unbounded, matched only by the investors’ FOMO — fear of missing out. 

In the midst of the frenzy, basic questions go unanswered: What is the product? Who will buy it? Will this company ever make money? Will it ever be profitable?

Dot-com bubble

I had a ringside seat to all this during the dot-com boom of the 1990s. I was a computer engineer with an avid interest in the internet and new technologies. I created my first web server while in college in 1992 and ran a very 1990s-style database-backed website where I programmed everything from scratch. I could see the game-changing potential of the technology. 

As I pursued my Ph.D. in New York City, I began spending time at a couple of web startups.

One of them had just a website with a few images, but investors were throwing money at them. Of course, the young founders had big ideas like, “revolutionizing media using technology.” The founders gave themselves important titles — CEO, COO, CTO — with little to no regard for their actual experience or abilities. The CEO was a former junior media executive. The COO and CTO, as far as I could tell, had no skills at all. Collectively, their biggest talent had nothing to do with tech or with media; it was an amazing ability to convince investors that they were onto the “next big thing.”

I would go to this startup’s office twice or three times a week, mostly in the evenings, after finishing my Ph.D. work at my lab, and the vibe was amazing. There were important meetings happening. There would be regular updates. “We closed a seed round of $2 million!” “We have hired our first 10 people!” They moved into a super swanky office in a lovely loft in TriBeCa.

Amidst the frenzy, it’s hard to resist. It’s sexy and tempting. I almost quit my Ph.D. program, as many others did, to jump in and join the company. Ultimately, I’m grateful I did not. That startup, along with most of the dot-coms of the era, went down the toilet.

When people think of startups, they usually think of the wildly successful ones. From that period emerged Amazon, Paypal, eBay and ShutterFly, and later arrived Google and Facebook. But for every eBay, there are hundreds like the startup I worked at that flopped and faded into obscurity. 

Crypto is here!

Fast forward to 2020 and in the aftermath of the global pandemic, the latest tech craze took off. Everyone, at first, was making money in crypto.

The ability of every startup to issue its own token fueled the bubble, as regular (retail) investors could get in on the action. The traditional gatekeeper preventing non-venture capitalists from entering the room disappeared.

VCs, for all of their faults, are professionals. They invest in startups for a living. They know startups are risky investments and have strategies and business models to accommodate for the risk. Most of the time, regular people are not allowed — by a suite of laws and regulations — to invest in startups because regular people don’t have the tools for sound due diligence. 

Because crypto startups could literally make their own money, everyone bought in, but nobody asked if these companies could actually make money (i.e., generate revenue). The added aggressiveness of the retail investor class meant investment rounds were closing fast. If you had any credibility as a founder, you could name a price.

In the fall of 2021, I remember hearing the pitch from one company, a DeFi technology developer, which was raising a seed round at a valuation of US$50 million — the company didn’t even exist at the time. No product, just credible founders with an idea. They had just started fundraising, and I asked when they hoped to close. “Two, three months?” I asked. “Actually, we’re closing next Wednesday,” said the CEO. They closed the round, raising money from a who’s who of crypto investors (including Coinbase, Blocktower, Polychain and Circle, to name a few). 

When you’re an investor in a hype cycle, and FOMO is the driving factor, the biggest fear is losing the deal. When you hear of the lax to no diligence that was conducted for the failed crypto exchange FTX, it’s easy to blame the investors. However, FTX was at the time the hottest company in the world. The company already had revenue of US$1 billion per year, it was growing at 1,000%, and all the big names were getting in. 

There are two big downsides to getting retail money into startups: At the first sign of trouble, the investors disappear just as fast as they came in. Additionally, the lack of due diligence dramatically increases the likelihood of scamsters.

For both crypto startups and retail investors, the marriage ended poorly more often than not.

Return of AI

In November 2022, just as FTX collapsed and crypto winter reached a trough, OpenAI’s release of ChatGPT suddenly energized the world of artificial intelligence. Naturally, it captured the imagination of the investment world.

The excitement blew up. Anybody who is anybody is talking about the power of artificial intelligence. VCs don’t want to be left behind. Hungry for deals in the crypto winter (and flush with the cash they raised in the pandemic), they are now pouring money into AI startups. Startups with good ideas and no products are getting insane valuations (for example, check out the US$1 billion valuation for Character.AI, a company with no revenue at all).

The founders are again in full hype mode. For example, the startup Stability AI, which just raised US$100 million, is now looking to raise money at a US$4 billion valuation to “build the foundation to activate humanity’s potential.” Nice. Meanwhile, Character.AI has declared its mission as: “Give everyone on earth access to their own deeply personalized superintelligence that helps them live their best lives.” Of course.

The venture capitalists are quick to follow. The New York Times recently reported, “Investors at Sequoia Capital wrote that generative A.I. had ‘the potential to generate trillions of dollars of economic value.’ And Lonne Jaffe, an investor at Insight Partners, said, ‘There is definitely an element to this that feels like the early launch of the internet.’” 

Does any of this sound familiar?