Now that we are more than a year removed from the start of this current macroeconomic downturn, we can glean some important lessons from the ordeal.

In the world of angel investing, perhaps no lesson was more fundamental than the emphasis on tangible value for a startup. You know, like profits.

A countless number of venture capitalists and angel investors were burned by buzzy startups that promised world-changing technology and offered little in the form of details.

In 2020 and 2021, those startups received what amounted to blank checks from hotly competitive bidders to fund these vague endeavors.

Now that we’re in 2023, the investment world is beating to a different tune.

Well, everywhere except for one place… Generative artificial intelligence (AI).

Following the mainstream sensation that was OpenAI’s ChatGPT and DALL-E, the floodgates have been opened on this technology.

We saw Microsoft invest a whopping $10 billion into OpenAI, and there appears to be a veritable arms race among the tech elites to harness the profit potential of these developments.

In the process, however, we’ve seen a reversion back to the frenzied competition of the pandemic, as investors throw exorbitant sums of money at startups that offer little in the way of a business plan.

For what it’s worth, there is room for both of the following statements to be true…

  1. AI will create more than $15 trillion of wealth in the next decade.
  2. There is more money available to invest in AI than there are AI companies to invest in.

The latter statement sets the stage for where we find ourselves today.

Take, for example, the generative-AI startup Mobius. Currently valued at $100 million (with other investors jockeying to up that valuation), this startup existed for a matter of weeks before being contacted by investors.

All anyone knew was the company intended to use AI to generate photos and videos, and that the four co-founders previously worked as lead AI researchers for Google.

Investors are even going so far as to scour the AI talent pools from the Googles and Microsofts of the world to ask a simple question (while dangling cash on a fishing rod): Any interest in starting your own business?

Look, where this frenzy differs from 2020 and 2021 is the confidence of investors that AI will be revolutionary – and, as a result, rake in the dollars.

The question beyond that fact is who will benefit most from that revolution.

Y Combinator, one of the most prominent startup accelerator programs, currently has 218 startups in its program. Of those 218, 50-plus are working on generative AI.

Meanwhile, estimates suggest the cost of developing a native language model on the scope and scale of ChatGPT sits at roughly $500 million.

For a startup, forget cost, $500 million is a dream valuation; for a company like Google, it is one more line on the balance sheet.

But, as OpenAI has proven, that does not preclude startups from not just seizing the opportunity, but taking the wheel. And it’s no accident that this is a sector that’s been earmarked as the Golden Goose among an otherwise grey landscape.

“There are a few times in technology where you really see a generational leap forward with revolutionary technology,” Salesforce venture investment lead John Somorjai told the New York Times. “These companies are the next trillion-dollar opportunities in software.”

In the same way that investors would be foolish to ignore the generative AI field, they would be similarly foolish to ignore their usual due diligence principles in evaluating a generative AI startup.

Discernment is key for angel investors to be able to avoid the opportunities that are noise for the sake of noise.