AI Gold Rush Why Betting on Small Software Firms is Like Backing an Old Prospector

Jerry Pettersson 2024

In the frenzied world of artificial intelligence, a digital gold rush is in full swing. But before you start throwing your money at every AI startup that promises the moon, let's talk about why investing in AI software companies without an established customer base might be as wise as backing a 50-year-old gold digger in the original Gold Rush.

Remember the California Gold Rush of 1849? While a few lucky prospectors struck it rich, it was the merchants selling pickaxes and jeans who really made a killing. Fast forward to today, and we're seeing history rhyme. The modern-day equivalents of those savvy merchants? GPU manufacturers like NVIDIA and AMD, who are laughing all the way to the bank as they sell the essential tools for AI development.

But what about the small AI software companies, the digital prospectors of our time? Well, they're facing a landscape that's about as forgiving as a sun-baked desert. Here's why:

First, AI is making software development as easy as asking your smart speaker for the weather. Got a brilliant idea for an app? Great! An AI can help you build it. The downside? It can help everyone else build it too, faster than you can say "patent pending." It's like trying to stake a claim when the entire mountainside is gold and everyone has a dynamite-powered excavator.

Second, the shift to local AI is changing the game faster than a chameleon in a disco. Those powerful chips in our phones and laptops are becoming AI powerhouses, capable of running 90% of AI tasks without breaking a sweat. This means the demand for cloud-based AI services could shrink faster than a wool sweater in hot water, leaving many AI startups high and dry.

Now, here's the kicker: investing in an AI software company without a large, established customer base today is like betting your life savings on a grizzled 50-year-old prospector who's just heard about gold in California. Sure, they might have dreams of striking it rich, but they're up against younger, faster competitors, changing terrain, and tools that are evolving at lightning speed.

Just as our hypothetical older gold digger might struggle to compete with younger, more agile prospectors armed with better tools, small AI software companies are facing an uphill battle. They're competing against free, open-source alternatives, AI-powered development tools that can churn out sophisticated software in minutes, and a market that's becoming more saturated than a sponge in the Pacific.

The big players with established customer bases? They're like the prospectors who arrived early, staked the best claims, and built up a operation. They have the resources to adapt, the customer base to sustain them, and the clout to shape the market.

But for the latecomers without a solid foundation? They're panning for gold in a river that's already been picked clean, while upstream, AI-powered excavators are rewriting the rules of the game.

So, what's an investor to do in this AI Gold Rush? Well, just as the smart money in 1849 went into shovels and blue jeans, today's savvy investors might want to look at the companies providing the tools and infrastructure for AI development. Or better yet, focus on the innovative firms that are using AI to solve real-world problems in unique, hard-to-replicate ways.

Remember, in a gold rush, it's not always the ones shouting "Eureka!" who strike it rich. Sometimes, it's the quiet innovator selling maps to uncharted territory or inventing a better way to sift through the noise.

In the end, the AI revolution is here to stay. But before you stake your claim on the next shiny AI startup, ask yourself: Am I investing in a spry innovator with a unique edge, or am I betting on an old prospector with a rusty pan, hoping against hope for one last lucky strike?