Speculative investors are unsure if advances in AI will bring them any money.

Gordon Ritter, the founder of Emergence Capital in San Francisco, believes recent advances in artificial intelligence represent a significant technological advancement.

He can’t see how to make any money from them.

Ritter says that everyone has dreams about the future. His firm was an early investor in start-ups like Zoom. “There is a stream [of opinion that AI will do everything]. We are going against this flow.

This skepticism is a reflection of tension between Silicon Valley VCs who are caught between excitement about AI and broader tech downturns that have led to lower investment in start ups over the last year.

The recent launch of “generative” AI tools like OpenAI’s ChatGPT chatbot has prompted new excitement about the possibility of an industry-defining company. It can answer complex questions using text and natural-sounding languages.

It was disclosed last week that Andreessen Horowitz led a more than $200mn investment in Character.ai. The chatbot-maker was valued at approximately $1bn. Inflection AI, a one-year-old startup founded by DeepMind cofounder Mustafa Suleyman, and Reid Hoffman, LinkedIn creator, is currently in discussions to raise $675mn. It raised $225mn last fiscal year.

Microsoft announced a multibillion-dollar investment in ChatGPT-maker OpenAI in January. According to people familiar with the talks, OpenAI wanted $10bn from Microsoft at a valuation of $29bn.

Many VCs are still cautious, despite the eye-watering valuations and the large amount of capital required by AI groups to build “foundation model” machine-learning systems. These systems require enormous amounts of data and computing power.

One investor stated that recent advances in generative AI required a lot of capital and computing resources. This is a huge technical feat, which can only be replicated by people with national-state wealth.

Another veteran investor said that companies are highly overvalued, and that the only valid investment thesis is to get in early. “Fomophobia is the reason you buy in.”

Microsoft’s agreement with OpenAI means that the company has access to the cloud computing platform Azure by tech giant Microsoft. Google paid $300mn earlier this month to acquire a 10% stake in Anthropic. This was at a time when the AI startup was purchasing significant computing resources from Google’s cloud computing division.

After Sequoia Capital and other top investors were burned, many are now enthusiastic about AI. However, cryptocurrency values have fallen in the past year, causing enthusiasm for AI to grow.

According to PitchBook, the value of deals made by US venture funds fell half a billion dollars between the first quarter and fourth quarter of last year. It was $81bn compared to $41bn. The value of crypto deals fell further, dropping by more than 80 percent over the same time period.

Sarah Guo, who was an angel investor in cryptocurrency exchange FTX and a leader in investment into crypto-sector venture capital firm Greylock a year back, has been drawn to AI’s potential.

FTX is now bankrupt, but Guo raised over $100mn for her new fund Conviction to invest in artificial intelligence. Although she believes now is a great time to invest, and AI deals are fiercely competitive, she admits that some valuations are absurd.

Many investors have stopped looking at foundation-model companies and are instead looking at the apps which will be built upon them. This is just like how huge businesses were built using mobile apps that work on mobile devices.

Some have waited to see if a “killer” app would emerge. Christina Melas – Kyriazi, a partner with Bain Capital Ventures, said, “If ChatGPT was the iPhone, then we’re seeing lots of calculator apps.” “We are looking for Uber.”

As consumers are able to interact with the technology to create amazing drawings and text-to-image programs like Dall-E, the buzz surrounding generative AI has grown.

The number of mistakes and unfavorable responses is increasing as more people use the software. Inaccuracies in sensitive areas such as defense and health are considered unacceptable. This could mean that a disruptive application could be far off.

YisroelBrumer, the founder of Red Cell Partners venture capital fund, stated that AI makes interesting mistakes that humans can’t. “You will be amazed at what you see the first time you go into combat.

He said that recent progress in generative AI was “incredibly impressive” and “well beyond what we thought we’d reach today”, but that it was difficult to delegate responsibility to a system making mistakes that are hard-to-predict and understand.

Others warn that investors who switch from crypto investments to AI investments could be trading one technology with very few commercial applications for another.

One venture capital investor who made a big bet on crypto said that “sometimes the bubble moves to one place to another, the money must go somewhere.” There will be many items that are too expensive during these hype cycles. There are many toys.