What does an AI Bubble look like: How to avoid the POP

The world of venture capital is often driven by trends, and few trends are as hot right now as artificial intelligence (AI).

Investors, keen to ride the wave of innovation, are flocking to AI startups, pouring billions into companies with the hope of striking gold. But as with any investment frenzy, there is a looming risk of a bubble. When market exuberance outpaces realistic expectations, the bubble inflates.

And if history has taught us anything, it’s that bubbles eventually pop...

What is a Bubble?

In the simplest terms, a bubble occurs when the price of assets in a particular sector becomes disconnected from their actual value.

Investors buy in, not because of solid fundamentals, but because of hype and the fear of missing out (FOMO).

In the case of AI, the technology's transformative potential is undeniable, but this potential is often exaggerated. Many startups promise revolutionary solutions, yet fail to deliver tangible results.

As more capital flows into these companies, valuations skyrocket without a corresponding increase in actual business performance.

This is where the danger lies...

What Does It Look Like When It Pops?

A bubble bursts when the market collectively realizes that many of these inflated companies were never as valuable as they seemed. When investors pull back, valuations can nosedive overnight. Startups that were once the darlings of the AI world suddenly struggle to raise funds, their business models exposed as unsustainable. It’s a rapid and brutal correction that leaves behind a wake of failed companies and burned investors. We saw this in the dot-com bubble of the early 2000s, where companies with no real product or revenue were valued in the billions until the market caught on and the bubble popped.

In the AI sector, a pop could look like a sudden realization that many companies are built on little more than promises. Startups boasting about machine learning algorithms or data-driven insights may fail to deliver meaningful, scalable solutions. When this happens, investors start asking the hard questions: What’s the revenue model? Where’s the traction? How is this business solving a real problem? If the answers aren’t convincing, the air quickly escapes, and the bubble bursts.

How Do You Avoid the Pop?

For investors looking to avoid the inevitable downturn that follows a bubble, the key is in identifying companies with real substance. This means avoiding the noise and focusing on startups that have a clear path to revenue, proven traction, and sustainable business models. Here’s how to spot them:

1. Look for Actual Traction, Not Just Promises: The most promising AI startups aren’t just talking about potential. They’re showing results. These companies have measurable success metrics and KPIs that haven’t changed just to impress investors. If a company has solid customer retention, repeat business, and growing revenue, it's a sign that they’re onto something real.
2. Invest in Problem-Solvers, Not Trend-Chasers: Companies that are genuinely focused on solving a specific problem, rather than just applying AI for the sake of it, are more likely to succeed long-term. AI should be a means to an end, not the end itself. Successful startups use AI to enhance their offerings, improve efficiencies, or create new value for customers. These companies stand out from those that merely add AI to their pitch deck to catch investor attention.
3. Seek Out Revenue-Generating Businesses: A large user base or high levels of attention can be misleading. It’s not enough to have millions of users if those users aren’t paying for a product or service. Sustainable businesses generate revenue from their customers and can demonstrate how they will scale that revenue as they grow. Companies that rely on the promise of making money later often end up being more air than substance.

Investing in Israel’s AI Ecosystem

As the AI landscape continues to evolve, Israel presents a unique opportunity for investors.

While most AI startups around the world have had the luxury to slide through investment rounds on the fact that they are an AI startup, Israel hasn't been so fortunate.

Following a 10 month long war and foreign investors pulling out their investments. That has made Israel an investment desert, driving all the unicorns out of existence, only leaving camels left to steadily trudge along to multi-billion dollar valuations.

For poorly placed Israeli companies, this was bad news. For foreign investors, great news, as it sifted out the potentially good from the actually great companies. War has sifted the wheat from the shaft in Israel, and the startup nation is now ripe with promising startups.