Could the AI Boom Be a Bubble?
Not only is artificial intelligence (AI) reshaping the labor force, it’s also impacting our political landscape, driving data center construction and even social media.
The growth and impact of AI have been both meteoric and monumental, but as I recently told Forbes, “41 percent of organizations worldwide plan to cut workforces before 2030 due to AI, but AI will reshape not just the job market, it will also the investment landscape.” Is all the rapid change setting the stage for an unintended outcome that could cost investors millions of dollars?
After all, venture capitalists are funding AI startups at a breakneck pace and the top tech giants are building out their AI infrastructure. But could this multi-billion dollar commitment to AI growth drive unsustainable levels of attention, optimism, and eventually, skepticism? To put it more directly: Are we in an AI bubble? And if so, how long before the bubble bursts?
Signs of an Investment Bubble?
It may help to look at some of the classic signs of investment bubbles — be they tulips or tech.
Staggering Growth
Investment in AI startups more than tripled between 2020 and 2023, and, with that growth, valuations have skyrocketed. Companies such as OpenAI, Anthropic and Stability AI have raised hundreds of millions of dollars in a very short amount of time, often at jaw-dropping valuations.
FOMO Funding
Fear of missing out (FOMO) is common in the startup world. Look at the early days of crypto and blockchain, when venture capital firms were overeager to fund nearly any promising project, whether they offered true value or not. Now, with AI, we are once again seeing multiple funding rounds, where due diligence appears to be AWOL and valuations outpace revenues — or realistic profitability projections.
Unsustainable Spending
Many AI startups are operating with high burn rates, spending aggressively on talent, cloud computing resources and marketing. This spending is often rationalized by the potential for massive future growth, but the gap between investment and sustainable revenue generation raises legitimate red flags.
Speculative Hype
Public discourse around AI is riddled with speculative projections. While AI undeniably holds transformative potential, not every application will yield billion-dollar outcomes. The gap between promise and reality can create inflated expectations.
Cooling the AI Fever
While the AI sector continues to generate headlines and attract capital, signs of a potential cool-off are emerging, suggesting, perhaps, cooler heads may prevail.
Valuation Adjustments
Several high-profile AI startups have faced valuation markdowns as revenue growth failed to keep pace with expectations, suggesting that some investors are beginning to demand clearer paths to profitability.
Regulatory Scrutiny
Governments around the world are paying close attention to AI. Regulations controlling data privacy, algorithmic transparency, and ethical AI usage could slow its growth.
Economic Pressures
Rising interest rates and signs of market volatility are making capital more expensive. AI startups counting on continuous funding rounds could find themselves in a precarious position.
Early-Stage S Curve
Despite the hype, many believe AI is still in the early stages of its S-curve adoption, with only about 10 percent of its potential realized. This suggests there’s significant room for growth, but it also signals the potential for heightened risk for those companies moving too fast.
Lessons from Past Bubbles
History offers cautionary tales. Both the dot-com bubble of the late 1990s and the crypto boom of the late 2010s serve as examples of how rapid growth can lead to unsustainable valuations, followed by sometimes painful corrections.
On the other hand, those bubbles gave us Amazon and Bitcoin — two enterprises that outlasted their respective booms. A bubble doesn’t negate the transformative potential of the technology that resides at its center. A bubble usually is simply an adjustment between short-term hype and long-term value.
AI is undoubtedly here to stay and will continue to reshape the world, but its current trajectory raises valid sustainability concerns. The sector’s rapid growth and sky-high valuations suggest we may be in a temporary bubble, but that doesn’t spell doom for AI. Instead, it signals that a cool-down period may be in the offing. For accredited investors who can weather the storm, investments in AI-related endeavors could pay off, but it’s safe to expect some bumps in the road ahead.
Looking Ahead
Want to enhance your understanding of what’s going on with tech in 2025, read Seven Trends to Watch for in 2025.
