Are A.I.’s lofty valuations justified? Some VCs think it is

Morning, Term Sheeters. Finance reporter Luisa Beltran here, coming to you from Fortune Brainstorm Tech 2024.

I’ve sat through several panels this week and the big topic of discussion, of course, remains A.I. Allie moderated a breakfast Tuesday where VCs discussed whether the lofty valuations that AI companies have attracted are justified.

Guru Chahal, a partner at Lightspeed Venture Partners, discussed how he’s been through several cycles in his career and has learned that paying for a transformative company isn’t really expensive—in hindsight. He pointed to OpenAI, which was valued at $27 billion to $29 billion in 2019. Earlier this year, OpenAI’s valuation jumped to $80 billion or more, the New York Times reported in February.

“The reality is, when there's any of these cycles, when you look back, every round at the time seemed incredibly expensive and, in retrospect, was incredibly inexpensive,” Chahal said.

Mary D’Onofrio, a partner at Bessemer Venture Partners, agreed with Chahal. “If you invested correctly, and actually backed OpenAI in 2019, you will look back and say ‘That’s incredibly cheap,’” she said. But for every OpenAI there are many companies that won’t work out. She mentioned the number of companies in SDR replacement AI software (these are AI tools designed to automate functions performed by sales development representatives) or companies that are trying to be personal agents or address customer success from various angles. “They're not all going to win,” D’Onofrio said.

Lila Tretikov, a partner and head of AI Strategy at NEA, said AI will be in everything just like digital is now in everything. “Every company will be an AI company in the end…It will be the fabric of everything,” she said.

There was also discussion about how these big valuations are set. Darian Shirazi, a general partner at Gradient Ventures, said he looked at the A.I. valuations for seed and pre-seed and discovered a surprising methodology that is used to come up with the numbers: “We make it up. There's literally no science to how we determine pre-seed and seed valuations,” Shirazi said.

Instead of methodology, valuations come down to whether other investors are looking at the company, if the GP has a strong conviction, and how much they want to own it, Shirazi said. Some VCs just want a company no matter what and will “overpay at some crazy price,” he said. He pointed to Wiz, which was valued at $12 billion in May when the startup raised $1 billion in a series E round co-led by Andreessen Horowitz, Lightspeed Venture Partners, and Thrive with just a few hundred million dollars in annual recurring revenue, according to reports at the time. Alphabet is said to be close to buying Wiz for a whopping $23 billion.

“Turns out that was a great idea,” Shirazi said.

See you tomorrow,

Luisa Beltran
Twitter: @luisarbeltran
Email: luisa.beltran@fortune.com
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This story was originally featured on Fortune.com