To understand the current AI bubble it’s necessary to understand the short moment of relative austerity which preceded it. This is how I described the mechanisms underpinning this austerity in yesterday’s post:
But LLMs have emerged at a point when inflation has increased operating costs for firms around the world, climate change means supply shocks will grow in frequency and intensity, higher interest rates have significantly increased the cost of raising capital, and equity investors are much more demanding of operational models than was once the case.
There was a much longer lasting austerity following the dot-com crash. But as Keach Hagey points out in The Optimist, there also a briefer wave of austerity following the financial crisis. From loc 1856:
FOR A brief moment, Apple lifted Loopt near the realm of social media royalty. The Apple television ad featuring Loopt had driven so many Loopt downloads on the iPhone that they surpassed those of Facebook and MySpace.6 But the timing could not have been worse. That fall of 2008, after Lehman Brothers collapsed, Sequoia had gathered the CEOs of its portfolio companies together for an emergency meeting on Sand Hill Road and told them the era of burning venture money for market share was over for the foreseeable future. The companies were advised to start cutting their way to profitability if they hoped to survive. The slide deck featured a tombstone with the words, “RIP Good Times.”7 In November 2008, Loopt hired the investment bank Allen & Company to either sell the company or get more investment.8 Given the financial climate, a sale was not especially likely.
It’s interesting that social media firms seriously took in the years following this, with a new category of product bringing tech investment out of a winter. Much as ‘Generative AI’ as a category inaugurated a new boom in investment, though it’s co-existing with continued layoffs albeit significantly reduced from their post-pandemic peak.
What I’d like to understand more is how survival shapes the dynamics of these waves of austerity. How power and influence accumulate through the simple fact of not collapsing during difficult economic periods. The firms driving the capital investment in AI (Microsoft, Amazon, Google) all either predated the dot-com crash or were founded in its wake (Meta). The networks of investors (e.g. Paypal Mafia) accumulate power through successive waves, riding them out as opportunities for leverage. This doesn’t mean that new firms don’t start, clearly they do, but they do so in a context defined by the accumulated wealth and influence of these incumbents.
Mark Carrigan 