The phrase “the definition of insanity is doing the same thing over and over, expecting different results” is often misattributed to Albert Einstein. However, it perfectly encapsulates the “cycle of insanity” in venture capital, as demonstrated by three distinct industries: Crypto, Esports, and Artificial Intelligence (AI).
Crypto: A Clear Demonstration of the Cycle
The crypto industry has experienced two major cycles of venture capital investment, coinciding with the all-time high price movements of Bitcoin. In 2017 and 2021-2022, venture capital flooded into the industry, with investors like Alameda Research (the now-bankrupt hedge fund of FTX founder Sam Bankman-Fried) leading numerous funding rounds. However, during off periods, investment dwindled, indicating that the focus was on speculation rather than the technology’s practical value or utility.
Esports: A Deeper Look at FaZe Clan
FaZe Clan, once the darling child of esports, perfectly showcases the cycle of insanity. The company raised over $40 million in multiple funding rounds and went public via SPAC merger with an expected valuation of over $1 billion. However, within a year, FaZe Clan lost over 97% of its stock value and was acquired by Gamequare for a mere $15.75 million. The company’s esports teams were losing substantial amounts of money each month, making it clear that the venture capital funding was misguided.
AI: The Biggest Iteration Yet
AI is poised to experience the largest iteration of the venture capital insanity cycle to date. Venture capital targeting AI has grown from $3 billion in 2012 to $75 billion annually in 2020, with over 20% of the entire venture capital market being devoted to AI-related startups in February 2024.
OpenAI, despite losing significant amounts of money, continues to attract massive investments. Sam Altman, the CEO of OpenAI, is reportedly seeking up to $7 trillion in funding for a new AI venture. This amount is equivalent to roughly 7% of the global GDP and over 1.5% of the entire human race’s personal capital.
Conclusion
The venture capital cycle of insanity continues to repeat itself, with investors throwing money at projects that have little chance of returning value, expecting different results each time. As the cycles grow larger, so do the consequences. It remains to be seen what will come of the current AI investment frenzy, but history suggests that caution should be exercised.
