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The recent Instoried debacle gives away the sense and nature of AI investments globally. The company started seven years ago with the motivation of adding empathy to users’ content and pitched the idea of AI. Cut to present, there is almost no sign of the company, which according to the now-deleted LinkedIn profile claimed to have created ChatGPT way back in 2019.
Sharmin Ali, the founder and CEO of Instoried, is reportedly miffed with the investors and is threatening to file a defamation lawsuit against them.
The once-promising startup that could have been riding the AI wave is now nowhere to be found. But more importantly, it shows that VCs are starting to get AI right and the story serves as a wake up call to the ones who still don’t.
The Implosion of the AI Wave
Ali’s investors have been sending her emails (which she claims are ‘ruthless’) since November last year seeking to know about her whereabouts. They have accused Ali of making far ambitious projections of what their investments could be turned into using her startup. According to the reports, Instoried was running fine until the AI buzzword came about with ChatGPT.
With a commitment of $200 million, Ali said that Instoried would be a unicorn soon, which was categorised by Mumbai Angels as a ‘soonicorn’. Today, most of the employees have left the company and the websites stand inaccessible.
There can be numerous such cases, if the investors are not cautious. Now, the risk is greater since everyone is building an AI startup, or at least calling it an AI startup.
The problem with investors all this while has been the lack of understanding of AI – something that’s slowly changing. The post that perfectly encapsulates this scenario is the recent one by Oliver Molander, where he spoke about how a lot of ‘AI-first investors’ have not even heard of much, apart from LLMs and generative AI.
The recent implosion of Inflection AI, where the two-years-old startup that raised billions of dollars and is now witnessing mass exodus with two of its co-founders and several employees joining Microsoft, is another testament to over-ambition in VCs. “They didn’t have revenue, PMF, or anything else to justify their valuation. They just had the right idea at the right wave,” said Manish R Jain on X.
The Wary Investors
In his recent post on X, Paul Graham stated, “There is no such thing as value investing in venture capital. The steep power law distribution of returns means you want to be in the best startups at whatever the price happens to be.” Here, Graham is making the argument that in VC investments, where the returns on successful investments follow a steep power law distribution, traditional “value investing” strategies, which focus on buying undervalued assets, don’t apply.
Instead, he suggests that VCs should invest in the best startups regardless of their current valuation. Essentially, he’s emphasising the importance of prioritising quality over price when it comes to investing in startups. “What’s the difference between a high valuation and a low one for a comparable company? 5x? If you use that as a selection criterion in a domain where the difference between a big success and a small one is 100x, you’re innumerate,” he added.
Gabriel from Boromir Capital posted on X: “AI is going to get us another three decades of 3% growth and that’s it. relax. finish your CS degree. invest in a diversified mix of assets. find true love and start a family (sic).” Investors are now wary of investing in AI startups as most of the AI companies, though are generating revenue, are not profitable yet.
The Indian investors
Shark Tank India, the show famous for a lot of weird AI investments and several missed opportunities, recently hosted Model Verse for a pitch. Srijan Mehrotra pitched the customisable AI model generator at ₹25 lakh for 10% equity.
Interestingly, Anupam Mittal asked all the right questions, from the API to the architecture used by the company, or if the company could be consumed by OpenAI. Model Verse eventually got the exact funding it asked for from Mittal, Ritesh Agarwal, and Amit Jain.
Interestingly, upliance.ai, India’s AI-powered home appliance company did not get any funding from the investors on the show. But later, it secured a ₹34 crore seed round at a valuation of ₹143 crore. The funding was led by Khosla Ventures, renowned for investing in AI startups like OpenAI, Rabbit, and Sarvam.
India’s first ‘AI-powered’ car by AI Cars also did not receive any funding from the Sharks, but seemingly for the right reasons as the concept of the car appeared far-fetched and over-ambitious.
In a world where everyone claims to be on the AI bandwagon, VCs are sharpening their wits and wallets. Remember, in the land of startups, separating the unicorns from the “soonicorns” requires more than just a sprinkle of AI magic—it takes a discerning eye and a healthy dose of scepticism.
