AI Boom Creates Downturn in Tech Industry

Vinay Wag’s venture is one of them. Earlier this year, he decided that now was the time to start a new company.

He left data storage company Databricks to found a startup aimed at helping companies adopt generative artificial intelligence. Since then, he’s poached tech veterans from established companies and sought to raise venture capital that seemed largely dormant in the dark clouds over much of Silicon Valley.

“This technology wave is here,” Wag said, before the last wave subsides.

In the winter, it looked like the industry could be headed for a long and painful recession. Tech giants were laying off tens of thousands of workers in favor of efficiency. The Nasdaq Composite Index was down more than 30% in 2022.

But since startup OpenAI unveiled a bot, ChatGPT, that can speak human-like language late last year, enthusiasm for AI has exploded among investors, business owners and technology users. The frenzy put an end to the downturn the industry was experiencing, and the recession took a different turn.

Despite slowing sales growth, the top tech stocks have rallied this year. Microsoft, which has invested billions in OpenAI, has added the technology to everything from its Bing search engine to its workplace software, touting itself as an AI pioneer. A longtime leader in the field, his Google has released several search features built on generative AI.

The Nasdaq is up 32% this year, the Dow Jones Industrial Average is up 3.4%, Microsoft shares are up 41% on optimism that AI will power businesses, and Nvidia shares nearly tripled. rice field.

After touting cost cutting and apologizing for hiring too many people, companies in recent years have added to the excitement by touting their AI ambitions. Of the S&P 500 companies that held earnings calls from mid-March to late May, 110 companies mentioned AI, according to FactSet. That’s a record high and about three times the 10-year average.

Spencer Kimball, CEO of database startup Cockroach Labs, who has spent decades helping build tech companies, says the pessimism has lasted longer. During the dot-com crash of 2000, when tech stocks crashed, he said, the highway from San Francisco to Silicon Valley seemed to clear from traffic almost overnight. And in 2008, the financial crisis deepened, driving capital out of the tech industry and causing companies to suspend hiring for long periods, he said.

In this recovery amid a recession, investors hope new startups will be more efficient than their predecessors, with less initial investment in infrastructure and smaller teams. Optimists argue that AI will automate many jobs, helping businesses stay leaner and reach profitability faster.

“Running a company on a tight budget has never been easier,” Kimball said.

Over the past eight months, pressure from investors to improve profitability has thrown many companies into turmoil, resulting in a spate of job cuts. Google parent Alphabet, Amazon.com, Facebook parent Metaplatforms and Microsoft are all laying off thousands of jobs. Smaller private technology companies such as payment processor Stripe have also cut jobs.

The downsizing of these companies and the fatigue among their employees are ultimately driving new AI ventures. Many startups are founded by or employed by retired or fired employees of large tech companies.

“Really good people are leaving companies as part of layoffs,” Wag said. He founded the company with colleagues from Databricks and retired LinkedIn executives. “Startups now have access to talent that was previously inaccessible.”

SoftBank Group Corp. Chief Executive Masayoshi Son said last month that the company plans to end the investment lull and focus on AI after ChatGPT chatbots reignited excitement about the future. “It’s almost time for us to fight back,” Son said at the annual meeting of a Japanese technology investment firm. “I want SoftBank to lead the AI ​​revolution.”

AI firms have even added a touch of oomph to San Francisco’s faltering real estate market. Chris Lauder, chief broker at Jones Lang LaSalle, said many AI companies are using the rental market to lock down office space. Many people want to live in the Mission District and adjacent areas. This area was popular with tech workers during the last boom.

AI optimism is not a panacea for everything that plagues the tech economy. San Francisco real estate remains in a historically dire state. Many companies are still in a recession, struggling to cut costs and raise capital.

Prateek Arsi, partner and co-head of the venture team at investment firm Tribe Capital, said some of the startups that raised money during the fundraising boom were likely to go bankrupt. Companies that need cash but fail to chart a path to profitability will still face “huge liability,” he said.

Still, the outlook is noticeably brighter when compared to the situation a few months ago.

Without the AI ​​boom, “it would have been more like winter,” Arsi said. “If AI saved some innovation in the trough, the trough would be deeper.”