The Great Sobering Of 2024: A Look Ahead For AI Startups

Steering Your AI Startup Through The Post-Hype Year Ahead

This is the first time I've ever had the courage to publish any kind of prediction.

In the words of Scott Galloway, who publishes predictions annually, it is a "shitty business.”

The events leading up to the realization of any prediction make it seem less extraordinary. And when you get it wrong, you’re an insufferable numbskull. The value of a prediction is in the act of making it, not the prediction itself.

Contemplating what may happen encourages us to take responsibility for decisions we make in the present. Also, revisiting a prediction and asking why it did/didn’t come to fruition provides insight into the machinations of our world and whether we are progressing or regressing.
-Scott Galloway, 2022 Predictions

In other words:

“Plans are worthless, but planning is everything.”
— Dwight D. Eisenhower

The environment for AI startups in 2023 was the most remarkable and unpredictable year of my career. Thus, trying to predict what will occur in the next post-AI year seems even more daunting.

But following Galloway's advice, I wanted to consider what events in 2024 might be consequential for the readers (and the writer) of this publication.

One likely future stands out to me as the most consequential:

2024 Will Be the Year AI Startups Goes from Hype to Hangover

It seems a a little “Dry January” style moment of sober contemplation might be in order.

2023 was the year of AI (Hype)

As a prior CMO of three startups, and having worked on AI-powered products for the last eight years, the shift in AI perception last year was unlike anything I’ve seen before.

In previous years, AI was not particularly attractive to customers. At Bryte for example, we frequently tested the "AI-powered" message, but found it to be a net-negative for most customers. Those who didn't understand AI were apprehensive about its implications, while those who did were skeptical about our actual use of AI. (Interestingly, it was always highly attractive to reporters regardless.)

However, everything changed in the months following Open AI's release of ChatGPT, marking an unprecedented watershed moment in AI perception.

Source: Google Trends

Though the ChatGPT bomb exploded in 2022, the ripple effects mostly reverberated and compounded through Q1 2023, making 2023 the year that AI “tipped.”

• Hyper-valuable new companies and new categories of products were spawned, particularly at the LLM layer, gifting remarkable valuations to companies like Anthropic and Mistral

• A new category of AI “Wrapper apps” (Custom front end with an API to a fine-tuned LLM) exploded onto the scene, including a reported 750,000 startups planning to bootstrap an AI product.

• “Powered by AI” became a proposition in it’s own right. Stating something like “The AI-powered CRM” or “Presentations Powered by AI” suddenly had tangible meaning, attracting AI-obsessed early adopters on that virtue alone

• Added to the firehose of new releases were product additions from established companies from Microsoft to Adobe to Canva

• All of this interest enabled rapid growth for new channels for discussing and discovering new AI products, including big newsletters like Ben’s Bites or Superhuman and many more directories

This frenzy reshaped consumer expectations, turning AI from a niche technology into a mainstream fascination.

By mid year at Bryte we noticed that AI had suddenly become a net positive for customers, and we started featuring it in communications, ahead of a dedicated AI assistant launch after I left.

However, as we move into 2024, I can’t help see a more sobering reality ahead.

The Double Crunch: Investor Skepticism Meets Consumer Cynicism

There are early indications that we're reaching "Peak AI," specifically in the realm of Generative AI. I don't predict a sudden burst of this bubble. Instead, a gradual loss of novelty is more likely, leading to AI startup founders being caught between two challenging forces:

1: The Investor Crunch

While startups worldwide suffered from high interest rates affecting their funding in 2023, AI managed to weather the storm.

In fact, in 2023, AI startups’ share of all American startup funding doubled from 2022, to a quarter of all startup funding combined.

In 2023, more than 25% of all investment dollars in American startups have been channeled into AI-related companies, a significant increase from previous years (where it averaged about 12% between 2018 and 2022).
Technopedia

Many commentators joked that AI was “the new Web3” meaning that there was some undue, irrational investing in the space due to investor FOMO.

The Early Stage AI Gold Rush

The most remarkable indications of AI startups bucking the funding downturn were seen at the early stage of seed and A.

Carta data reported 2.5% growth in funding for AI companies, while overall seed stage startup category was down 34%

The Series A crunch

The Series A crunch, a situation where numerous seed-funded startups compete fiercely for Series A funding but few succeed, is not a new occurrence.

As mentioned in my previous posts, the most formidable barrier for startups is the gap between Seed and A rounds. In this phase, investment considerations shift from hype and FOMO to more tangible factors, such as revenue and traction.

However, as 2023 experienced an increase in seed-stage funding, and considering the average time between Seed and A rounds is 12 to 24 months, we could reasonably expect a surge in seed-funded AI startups seeking Series A round funding in 2024.

This suggests an exceptional year of numerous hyped Seed AI startups needing to generate traction to attract institutional investment.

Note: The Carta data above shows an even larger differential at A, therefore a Series B crunch also be exacerbated, but this could been skewed by a small number of outlier startups raising exceptional A rounds, rather than a significant volume.

2: The Customer Crunch

While the supply and demand for AI products seen in 2023 were remarkable, they are likely not sustainable.

In Q1 of 2023, there was a record-breaking 300% increase in the number of new AI products introduced on Product Hunt compared to the previous quarter.
Wire19

But it wasn’t just a case of volume. AI products received a disproportionate share of interest too. In fact 50% of all the “Top” launches on Product Hunt were AI-related.

While many of these AI products are impressive to the extent of initially feeling magical, (my personal hat-tip to Framer and Gamma, among others) customer expectations normalize quickly, with the once exceptional quickly becoming expected.

Furthermore, as customers encounter an excess of AI products that don't live up to their lofty promises, enthusiasm from the demand side may wane or even turn into skepticism. As a result, the allure of "AI powered" as the primary selling point will probably lose its appeal quite soon.

Above all, the temporary increase in demand-side funding is probably not sustainable.

While new categories can occasionally create entirely new budget lines from buyers, more often, the budget is being reallocated from somewhere else.

AI in 2023 may have seen a temporary exception to this rule. Indeed as an “n of 1” myself, I currently pay subscriptions to Open AI, Notion AI, Airgram AI and Canva AI that I was not paying for previously, and that has not been funded by cancelling other subscriptions.

But with interest rates projected to remain high through 2024, neither B2B nor B2C buyers can sustain such incremental spend indefinitely.

Something is going to get cut.

Combined crunch

Combine these two forces, and AI startups in the 2023 cohort might face higher traction expectations to secure a Series A funding, precisely when this traction is more challenging to achieve.

As the Carta data shows, investors attributed higher valuations to AI-based companies compared to their non-AI counterparts, indicating likely inflated expectations for the performance these companies need to deliver.

(More startups + higher expectations) x (tougher customer traction) = Pain

From Hype to Hangover

The hangover side of my prediction then, is not that AI will be less innovative or valuable in 2024, and certainly not that a bubble will pop.

It’ll be more of a feeling that “the music has stopped playing” at the AI party, or perhaps I should say the drunken high of 2023’s AI hype will give way to a dawning hangover of cold hard business realities.

This sentiment is echoed by the aforementioned Scott Galloway newest predictions, which coincidentally just arrived in my inbox literally as I am writing this.

Here’s a an additional nugget from Scott’s prediction “Peak AI.”

This year the AI bubble won’t burst, but it will deflate.
–Scott Galloway

Essential Strategies for AI Startups in 2024

If you run an AI startup navigating these shifting sands, this January is an excellent time to take a sober look at some business fundamentals:

Problem Validation

Have you validated that you solve a fundamental human/business problem? or is your product mostly AI as a solution looking for a problem?

Ensure your product is not just a cool tech demo but genuinely solves a real user problem. Your AI should offer practical, real-world value, not just a fleeting wow factor.

Customer Validation

Do you have a well defined and valuable customer segment beyond just the initial AI innovators?

If your early growth has primarily been driven by a wave of early innovators motivated by fascination with all things AI, that’s a problem.

Identify a market that transcends the AI hype. As I’ve previously written, your early adopters should be defined by their need for your solution, not just their fascination with AI.

Proposition Validation

Does your customer messaging fundamentally rely on a message of AI-powered? Or do you have a proposition that will fundamentally resonate without even mentioning AI?

Craft a narrative that resonates with your audience without leaning on the AI crutch. Your product's value should be clear, even when stripped of the AI label.

Solution Validation

Does your product truly and meaningfully solve the customer’s problem? Or are there deficiencies of effectiveness that are being compensated for by AI?

Radical Differentiation

Is your product unique and defensible in some way other than fact it includes AI? Or is the addition of AI the main differentiator?

Expect AI features to commonplace and table stakes across your competitive set very soon, if they are not already. Your unique selling proposition should be compelling in a crowded marketplace, with AI just providing the gravy on top.

Scalable Traction

Is your model for acquiring customers primarily dependent on the fireworks of AI hype launches? Or have you transitioned to more sustainable and scalable flywheel strategies?

Read my last article for advice on strategies that will remain effective as market dynamics evolve.

Preparing your AI Startup for Sobriety In 2024

The journey ahead in 2024 for AI startups is challenging, requiring a nuanced approach to product development, market positioning, and storytelling.

If these challenges resonate with you, there are a few ways I can help:

Consider a “Pre-Due Dilligence” in advance of your Series A

I'm currently collaborating with an expert who conducts professional marketing due-diligence audits for prospective Series A startups on behalf of VC investors.

We offer a "Pre-DD" service for seed-funded startups that are 6-18 months away from a planned Series A fundraising round. As you might expect, the idea is to conduct a comprehensive audit simulating your actual due diligence at the time of the real fundraising round. This will provide a clear gap analysis, highlighting what you need to accomplish to secure the challenging Series A funding.

I’m interested in making an exceptionally compelling price offer to one startup founder that would like to trial this service with me. You can contact me here or DM me via LinkedIn if you’re interested.

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I dedicate this free publication to sharing strategies and insights that ensure your startup thrives in the post-hype reality of AI.

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P.S. On January 30th I’m hosting the first AI-focussed IRL meetup in Marin. It will be a small, intimate group of vetted attendees with a focus on quality conversations.

So if you love AI in any form and happen to be in or near to the North Bay of San Francisco, click here to view the event and register.