These boom-and-bust technology cycles show that AI investments will rebound quickly if they decline.

This technology is laying the foundation for future investment opportunities. Companies that can deploy GenAI responsibly will likely achieve sustainable success and avoid the boom and bust cycles that characterize most innovations. While there will inevitably be winners and losers, the recovery periods between life-changing innovations will likely continue to get shorter, a trend we’ve seen especially in recent technology history.

PCs Increase Access for Businesses and Consumers (1980s)

In the 1980s, the development of the microchip made personal computers widespread, enabling consumers and businesses to better organize information. Between 1980 and 1983, the prospect of huge profits in the growing software technology market led to $739 million in venture capital funding for a growing number of computer start-ups to drive innovation. It also spurred the creation of new venture capital firms in the United States; according to statistics from the National Venture Capital Association, in 1980, 92 venture capital firms managed $4.1 billion; by the end of the decade, there were nearly 400 firms managing $28.6 billion.

Market declineThe computer boom was curtailed by the Black Monday stock market crash in October 1987. The crash made it difficult for high-tech companies to raise capital and make sales.

The expansion of the Internet ushered in a new era of commerce (late 1990s to 2001)

As economies recovered from the collapse of the computer and the disk drive, the Internet built on innovations in personal computing and evolved into a medium for commerce and social interaction. Networked PCs revolutionized the way businesses were run and laid the groundwork for the dot-com boom and growth of e-commerce in the late 1990s.

Entrepreneurs created websites to sell products, build and promote new businesses, streamline processes, and share information more efficiently. The Internet has broken down barriers of access, reaching international markets and allowing businesses of all sizes to reach consumers directly.

A wave of venture capital funding fueled the growth of this new medium and allowed online innovation to flourish. Investment in venture-backed companies peaked in 2000, driven by $24 billion in software investment, which also laid the foundation for the large technology companies that power our economy today.

Market declineThe lack of a sustainable, profitable business model and massive overvaluation led to the dot-com bubble bursting in 2001.

The advent of smartphones and the explosion of social and mobile technologies (2005-2021)

The advent of smartphones and faster, better internet connections led to the proliferation of mobile technology and apps. As smartphones became more widespread, virtually every industry adopted mobile and digital technologies, opening the door for the emergence of the sharing economy.

A number of successful companies emerged that allowed people to share just about anything. The proliferation of sharing apps and services coincided with the 2008 financial crisis, as people sought alternative ways to generate income and save money.

At the same time, low interest rates and advances in computing power and cloud-based technologies spurred the creation of over 50,000 venture-backed companies by 2021, with companies raising $341 billion in venture capital funding. The number of unicorn startups, valued at over $1 billion, skyrocketed. This era was also marked by fierce competition, with large amounts of venture capital money flowing into the space, leading companies to offer free trials to potential customers in an effort to improve their market share.

Market decline: Post-COVID market volatility forced the industry to course correct. Many companies grew quickly, added headcount and expanded into businesses that never delivered tangible results. A major shift in investor priorities and a reset of valuations also halted the free flow of private capital.

The Rise of GenAI (2022 to Present)

In Q1 2024, deal volume fell to its lowest level since 2012 as investors scrutinized value propositions. Companies in the GenAI space were the exception to the rule: without funding targeted at AI-related companies, the $32.8 billion in venture capital raised by companies in Q1 2024 would have been significantly lower.

GenAI has the potential to usher in an era of massive growth across nearly every industry. While many companies have been developing use cases and applications for GenAI for years, the technology is still relatively new, encouraging significant investment in startups.

Potential impacts of this technology include:

• As investors adopt a first-mover advantage mentality and stimulate large capital inflows into these companies, overexposure of GenAI in the market is inevitable.
• As the GenAI ecosystem expands, significant funding is being funneled into companies providing the software, microchips, datasets and other elements that are essential for AI to function and advance.
• We will be putting significant VC funding into energy companies that can provide more sustainable sources of energy to meet the massive electricity demands that GenAI will require.
• The transformative potential of AI also poses significant risks from its misuse, which will lead to increased focus for businesses and government agencies on responsible use of GenAI.

Despite the surrounding enthusiasm, there are concerns about the sustainability of the current funding surge into GenAI. Overinvestment in this technology could lead to another market decline if the products brought to market are not as cutting edge as expected. However, as seen in technological evolution in both the computer and internet industries, past patterns suggest that recovery and eventual success are likely.

While challenges remain for entrepreneurs and investors alike in the aftermath of the recent bull market, history shows that every cycle provides new ground for venture capital to capitalize on new opportunities to recover faster and come back even stronger.

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