Inside the AI Bubble Machine
The AI Bubble Is Real. The Tech Survives. The Tourists Don't.
Welcome to the Hype Casino
Picture it: late 2022. Somewhere in Silicon Valley, a VC in a Patagonia vest spits out his cold brew when his intern shows him ChatGPT writing a haiku about cloud computing. "Holy sh*t," he whispers, "it's the next internet."
Suddenly, everyone from Harvard dropouts to suburban dads with too much time on LinkedIn "discovers" AI. Kids are cheating on homework, journalists are filing columns written by bots, and every second person is tweeting like they've just seen fire for the first time.
Overnight, the startup world mutates into a casino. Pitch decks multiply faster than bacteria on a week-old burrito. Slide 1 is always the same:
"Your AI Co-pilot for [Insert Industry You Don't Understand]."
Everyone's valuation floats off the floor like helium balloons at a kid's birthday party. The only smell stronger than the stale Red Bull in the coworking space is pure, uncut FOMO.
We've seen this movie before. Dotcom bust. Crypto winter. Tulip mania. And now: AI Pandamonium. The only difference is that this time, the wrappers aren't even hiding the fact they're fragile. They're practically screaming: "Please clone me, it only takes a weekend."
It actually does take a weekend. Friday hackathon, Monday startup.
Act I: Ignition - The ChatGPT Moment
ChatGPT drops in late 2022, and suddenly AI goes from "niche research thing nerds talk about" to "holy hell, my 12-year-old just got ChatGPT to do his history essay and now he's grounded."
Investors feel the collective tremor. They call emergency off-sites at Napa Valley vineyards, sipping organic wine while telling each other: "This is it. The next internet. We can't miss it." Never mind that none of them can explain how the tech actually works. Who cares? They saw the haiku.
Founders smell blood in the water. Pitch decks flood in. Every title is a Mad Lib: "Your AI co-pilot for sales." "Your AI co-pilot for HR." "Your AI co-pilot for dating."
And the investors? They can't shovel cash fast enough. Early rounds oversubscribe. Pre-revenue startups hit $100m valuations. Every networking event feels like a cult revival where the sermon is just "Tokens! Moats! TAM!" shouted into a microphone.
The ignition is complete. The fuse is lit. Nobody notices the dynamite it's attached to.
📜 Storytime: Dotcom Déjà Vu
1999 was a simpler time. Pets.com spent millions to sell you dog food on the internet, Webvan thought people wanted groceries delivered by servers on rollerblades, and every second startup added ".com" to its name like it was a cheat code for instant funding.
Valuations went vertical, Super Bowl ads were bought by companies that wouldn't survive the year, and venture capitalists declared "eyeballs" a metric you could build a business on. (Spoiler: you couldn't.)
Fast-forward to 2023, and the pitch deck Mad Libs haven't changed. Replace ".com" with "AI-powered," and you've got the same empty calories in a new wrapper. Sock puppets then, AI note-takers now. The costumes change, but the play is identical.
History doesn't repeat, but it sure as hell does rhyme.
Act II: Gold Rush - Wrappers, Wrappers Everywhere
By early 2023, the streets are paved with wrappers. AI note-takers. AI résumé polishers. AI therapists. AI coaches. If you can name it, someone slapped "AI-powered" on it and spun up a landing page.
Unit economics? Don't be ridiculous. The only metric that matters is "monthly active users," and if you have to bribe them with free tokens to stick around, so be it. Retention curves look like ski slopes, but in the land-grab phase, who's measuring?
No one. Unless you count interns making "growth dashboards" in Google Sheets.
Big Tech sees the gold rush and plays both sides like the house in Vegas. Microsoft pours billions into OpenAI while simultaneously selling Azure credits back to the very startups it "supports." Google pushes GPUs like a dealer at a rave. Amazon watches quietly, counting the AWS bills. This isn't venture investing; it's money-laundering with compliance teams.
And the analysts? Frothing. "Trillion-dollar TAM!" they yell, as if "AI-powered recipe generators" are somehow larger than Germany's GDP.
⛏ Storytime: The Australian Gold Rush
In the 1850s, tens of thousands of people flocked to Victoria and New South Wales to dig shiny rocks out of the dirt. Some got lucky, but most went broke. The real fortunes weren't made by the dreamers in the riverbeds - they were made by the people selling shovels, pans, canvas tents, and overpriced beer.
Sound familiar? Today's AI goldfields are littered with wrappers - shiny, fragile, impossible to defend. The modern-day "shovel sellers" are NVIDIA, AMD, and the cloud landlords. They don't care who strikes it rich; they'll take your money either way.
Back then, the Australian gold rush left behind ghost towns when the hype dried up. Today's equivalent will be empty Slack groups, abandoned Discord servers, and SaaS landing pages nobody visits.
The pattern is identical: desperate prospectors, broken dreams, and a small group of merchants laughing all the way to the bank.
History doesn't repeat, but it sure as hell does rhyme.
Act III: Peak Mania - Valuations Detached From Oxygen
By 2024, the bubble has gone full cartoon physics. Startups with no moat, no revenue, and user churn so bad they could double as revolving doors are magically worth a billion dollars. Unicorn confetti rains down.
"AI-powered" becomes the new ".com." Slap it on anything and watch the valuation double. AI spreadsheets. AI CRMs. AI toasters.
The press can't shut up:
"This changes everything."
"The end of creativity as we know it."
"Robots stole my job, and they're better at Excel too."
VCs raise AI-specific mega-funds. Conferences explode with hype. Every founder suddenly has a Medium post titled "AI is the Electricity of Our Era" (translation: "fund me please").
🖼 Storytime: NFT Flashback
Remember 2021? People were mortgaging houses to buy pixelated monkeys. Celebrities were "dropping" cartoon JPEGs for millions, Twitter profile pictures became status symbols, and your cousin Dave was trying to convince you that "the floor price" mattered more than actual money in your wallet.
For a while, the hype was intoxicating. Discord servers buzzing, OpenSea volumes skyrocketing, articles breathlessly declaring that NFTs were the "future of ownership." Then the music stopped. The floor collapsed, celebrities deleted their ape avatars, and Dave stopped talking about it at Christmas.
Sound familiar? Now swap "NFT marketplace" for "AI wrapper." At least you could screenshot an NFT and laugh. Paying $30/month for an AI-powered notepad that forgets your name? That's less funny. Same speculative sugar high, same inevitable crash - just with higher GPU bills this time.
History doesn't repeat, but it sure as hell does rhyme.
Act IV: The Crack - Gravity Sneaks Back
Reality eventually shows up with a baseball bat. Growth stalls. User churn starts to look like arterial bleeding. Infra bills eat half your runway.
A flagship company - the Pets.com of AI - bellyflops its IPO. Billions gone, investors burned.
Meanwhile, open-source creeps in like cockroaches. LLaMA, Mistral, Hugging Face. For 90% of use cases, they're "good enough." Suddenly $30/month for a wrapper feels like tipping a waiter at a restaurant that closed in 2019.
Regulators pile on. Compliance costs balloon. The cracks become craters.
💰 Storytime: Crypto Winter
Crypto has had more winters than Game of Thrones. 2013, 2018, 2022 - each time the same pattern. Endless hype, token launches, "community" rallies, then the inevitable collapse. The survivors huddle around their Discords muttering "WAGMI" while everyone else quietly deletes their MetaMask wallets.
In 2018 especially, startups that bragged about "disrupting finance" suddenly discovered their disruption involved firing half the team to extend runway. They called it "focusing on core strategy." Investors called it "please don't sue us."
Now watch AI wrappers do the same.
"Refining the product" = we cut engineering to two interns. "Streamlining our go-to-market" = we couldn't afford the AWS bill.
The survival theater doesn't change - just the acronyms.
History doesn't repeat, but it sure as hell does rhyme.
Act V: The Pop - Panic and Pullback
Cue the chaos. Investors sprint for the exits. Wrappers vanish faster than free trials expire. Mid-tier "platforms" implode.
Media does a 180: yesterday's "AI will save humanity" headline becomes today's "AI bubble bursts." Founders post teary LinkedIn updates: "Taking time off to recharge." Translation: their board finally cut off the corporate Amex.
Valuations reset brutally. The emperor is naked, broke, and still owes Microsoft for last month's Azure bill.
Azure always collects. Always.
🪦 The 5 Stages of Startup Grief (AI Edition)
Denial "This isn't a bubble. We're different. Our TAM is trillion-dollar!" (So was everyone's. Spoiler: it wasn't.)
Anger "Why is churn so high? Why are infra costs eating our runway? Why is Hugging Face free?!" Translation: yelling at GPUs doesn't make them cheaper.
Bargaining "If we just pivot to enterprise… if we rebrand to 'AI for Governance'… if we raise a SAFE extension…" Every pivot is just a slightly fancier coffin.
Depression LinkedIn post: "Taking time to recharge and reflect." Reality: crying into a $7 oat latte while deleting the Slack workspace.
Acceptance "We were early." (That's startup-speak for "we were wrong, but let's pretend it was strategy.")
Act VI: Winter - Consolidation and Attrition
Silence. The battlefield is littered with pitch decks and unpaid invoices. Survivors whisper "sustainable revenue" like monks in a burned monastery.
Open-source dominates the mid-market. Big Tech owns enterprise. Niche vertical players survive by solving boring, defensible problems.
The rest? Layoffs, acquihires, and fire-sales.
But one sound remains deafening: NVIDIA's earnings call. Because while everyone else freezes, the shovel sellers are still partying like it's Coachella.
They're not "shovel sellers." They're "GPU deities." Worship accordingly.
🌷 Storytime: The OG Bubble; Tulip Mania
In 1637, Dutch investors were outbidding each other for… tulips. Yes, flowers. At the peak, one rare bulb was reportedly worth more than a house. (Imagine explaining that to your wife: "Honey, I sold the farm. But look at this sick tulip!")
Of course, the bubble popped, people were ruined, and history filed it under "let's never do that again." Fast-forward a few centuries: dotcom bust, crypto winter, NFT JPEGs, and now AI wrappers. Different asset, same dopamine hit.
It really does make me think: humans are seriously the worst at learning. You'd think we'd understand this by now, but somehow we just keep making the same mistakes in slightly different outfits. We are creatures of inevitable habit and poor decisions, sprinting headlong into the same wall and acting surprised every single time.
History doesn't repeat, but it sure as hell does rhyme.
Act VII: The Survivors - The Boring Giants
The great irony of every bubble is that the survivors are never the sexy disruptors with TED Talk charisma and neon slides about "changing humanity." They're the boring bastards. The infra guys. The incumbents. The companies everyone dismissed as "not moving fast enough" while they quietly positioned themselves to still be standing after the hype-binge hangover.
When the dust clears, the winners are exactly who you'd expect:
NVIDIA, AMD, TSMC - the GPU cartel. While thousands of wrappers bled out on their cloud bills, Jensen Huang was casually selling shovels in the gold rush. Every training run, every inference, every "AI co-pilot for dog grooming SaaS" - all of it flowed through their silicon. They don't care if you make a billion or go broke in six months. They sell you the chips either way. Their moat isn't just deep, it's measured in fabs and government subsidies. Competing with them is like challenging Poseidon with a garden hose.
Microsoft, Amazon, Google - the cloud landlords. If NVIDIA is Levi Strauss selling jeans in the goldfields, the cloud giants are the landlords charging miners rent to sleep in the dirt. They're investors, infrastructure providers, and rent collectors all rolled into one. You burn VC cash to buy compute, and half of it flows right back to Azure, AWS, or GCP. They literally make money whether you win, lose, or pivot into "AI-enabled artisanal candle subscriptions."
Adobe, Salesforce, Shopify - the incumbents. They never screamed "We're an AI company now!" because they didn't need to. They just wove AI into the products you were already paying for and quietly raised ARPU while the wrappers were writing Medium posts about "changing the world." This is the unsexy genius move: not betting your life on a standalone AI wrapper, but folding AI into workflows that already have customers, budgets, and inertia.
Open-source ecosystems - the Linux of AI. Hugging Face, Mistral, Meta's LLaMA ecosystem: the cockroach collectives. They aren't chasing hype; they're building tools that will quietly underpin everything else. Just like Linux became the invisible backbone of the internet while investors were fawning over flashy dotcoms, open-source AI is already seeping into every corner of the stack. It's boring. It's relentless. It wins.
Vertical specialists - the cockroaches. They don't need trillion-dollar TAMs. They need one niche, one moat, and the patience to outlast the tourists. AI for law. AI for radiology. AI for logistics. Industries with regulation, proprietary data, and workflows too gnarly for hobbyists. These are the cockroach startups - small, ugly, hard to kill. They won't be unicorns, but they'll be profitable, defensible, and around long after the hype has moved on to quantum NFTs or whatever's next.
And then there's everyone else. The wrappers, the copy-paste SaaS plays, the startups whose only moat was "we put AI in the tagline." Pets.com with a prompt interface. Maybe they get acquihired. Maybe they fade into irrelevance. Maybe they pivot into "AI for enterprise slide decks" and squeeze out a lifestyle business. But they're not the giants.
Because the giants are boring. They sell the picks and shovels. They own the distribution. They hold the data. They know that the real trick isn't convincing TechCrunch you're the future - it's surviving long enough to become infrastructure.
But don't you worry, the failed wrappers will still try to sell you their hoodies and coffee mugs on clearance. Or better yet, get turned into Satire companies like Enron
The Takeaways
🐶 You Might Be the Pets.com of AI If…
Pets.com became infamous for raising hundreds of millions, buying a Super Bowl ad, and then imploding because - shocker - shipping 20-pound bags of dog food wasn't profitable. Today's AI wrappers are spiritual descendants of that sock puppet. Here's how to know if you're next:
Your only moat is a cool domain name. If your biggest asset is that you grabbed AIforDentists.io before anyone else, congratulations - you're not building a company, you're squatting on a URL. (Investors will eventually notice that GoDaddy isn't a moat.)
Your gross margins get worse the more users you add. Traditional SaaS scales beautifully - serve one user, serve a million, the marginal cost is close to zero. AI wrappers? Every new customer just means another GPU bill. If growth is accelerating your death spiral, you're Pets.com with better branding.
You call your churn "healthy experimentation." Look, people signing up, playing for a week, and leaving isn't a growth strategy. It's a funeral in slow motion. If your retention curve looks like a cliff dive, no amount of "growth hacking" slides will hide it.
You've raised $100m and accidentally sent half of it straight to Microsoft. When your biggest expense is subsidizing Azure's quarterly earnings, you're not a startup, you're a pass-through wallet for Satya Nadella. Pets.com at least got to keep the sock puppet.
Bonus red flag: You spend more time talking about "defensibility" than building it. If you have to say the word "moat" more than once a week, you probably don't have one.
🧥 The Patagonia Vest Index
Forget economic indicators. Forget inflation reports. The single best way to track a tech bubble is to look at what VCs are wearing. Fashion is the macro signal nobody talks about:
VCs in Patagonia vests = bubble inflating. When times are good, the uniform is consistent: Patagonia fleece, Allbirds, a MacBook full of Calendly links. The vest is like a peacock feather - a visible display of confidence. Translation: money is flowing, valuations are stupid, and every pitch deck looks like a winning lottery ticket.
VCs in hoodies = bubble popped. When the downturn hits, the vest gets retired. Suddenly, it's hoodies and jeans, a performative nod to "getting back to basics." They'll talk about discipline, sustainability, and "remembering why we started." What they really mean is: "We lost a lot of money and are pretending it was character-building."
VCs in silence = they've already rotated into climate tech. The most ominous signal of all is no signal. When the Patagonia disappears entirely, so do the term sheets. They've moved on to the next hype cycle - solar credits, fusion, whatever looks like the next 100x. If your calls aren't being returned, it's not personal. They're too busy Googling "carbon capture startup decks."
Bonus signal: If they show up in linen shirts talking about "impact," run. That's not a pivot, that's an obituary.
The Boring Founder's Field Manual
(How Not to End Up in the Startup Graveyard)
Here's the unsexy truth: if you want to survive the AI bubble, you don't need vision-quest vibes or trillion-dollar TAMs. You need boring fundamentals. The kind of stuff that won't get you a TechCrunch headline but might actually keep the lights on.
Own distribution. If you're just "another tab," you're already dead.
Hoard unique data. Pitch decks aren't moats. Proprietary datasets are.
Obsess over unit economics. Every token costs real money. Pretend it's yours.
Ship AI as a feature, not a shrine. Solve a KPI, not a philosophy.
Pick a vertical and dig trenches. TAM is for tourists. Niches pay rent.
Governance > gimmicks. Enterprises don't buy "wow." They buy "won't get me fired."
If this sounds boring, congrats - you might actually live to see Series B.
💸 Why Do We Keep Falling for Bubbles? (And Why VCs Keep Writing Checks)
Let's pause the roast for a second and ask the obvious question: why do we keep doing this? Why do investors, who supposedly went to fancy schools and know how numbers work, keep lighting money on fire chasing the next big thing? Why do founders keep building wrappers they know can be cloned in a weekend?
The short answer: because the incentives are broken. The long answer:
1. Growth > Profit (The Venture Commandment)
Venture capital doesn't care about profits in the early stages. It cares about domination. The commandment is simple: grow fast enough, capture enough users, and profits will follow eventually. It worked (kind of) for Uber. It worked (kind of) for Amazon. But here's the difference: those businesses could lean on economies of scale. Servers got cheaper. Logistics got more efficient. Margins improved with time.
AI wrappers? Not so lucky. Every inference has a cost. Scaling doesn't magically make tokens free. Growth is a treadmill, not a flywheel. You can run faster, but the belt keeps burning your shoes.
And you're paying by the token for the privilege.
2. Tokens Have a Toll
In classic SaaS, once you've built the product, serving 1,000 users costs about the same as serving 10,000. Margins widen as you grow.
AI breaks that rule. Every call to the API costs something. Every user makes your margins worse. Wrappers assume SaaS-style profitability, but they're really just thin layers on top of someone else's metered pipe. You're not SaaS. You're reselling cloud compute with a pretty UI.
This is why infra players love funding you. It's not philanthropy. It's customer acquisition disguised as venture investment.
3. The Greater Fool Flywheel
Here's a dirty secret: a lot of investors don't actually believe in the companies they fund. They believe in the next round. They're betting not that you'll be profitable, but that someone bigger and dumber will buy your equity before the music stops.
This is the greater fool theory in a Patagonia vest:
Seed → "I'll flip it at Series A."
Series A → "I'll flip it at Series B."
Series B → "SoftBank will buy it."
SoftBank → crickets.
It's not about conviction. It's about momentum. Everyone's hoping they're not the last fool holding the bag when the bubble pops.
4. The Cloud Circle
This one's almost beautiful in its cynicism. Big Tech invests in startups. Those startups immediately spend half their raise on cloud compute… provided by Big Tech.
Microsoft invests in your Series B.
You scale on Azure.
Microsoft reports record cloud earnings.
It's not money laundering. It's cleaner. It's a perfectly legal feedback loop where the spreadsheet always smiles. Startups think they're being validated. Really, they're just prepaying Microsoft's dividend.
5. FOMO as a Business Model
The other driver is simple: fear. Investors missed the internet. They missed crypto. They missed NFTs (thankfully). They cannot afford to miss AI, because missing the Next Big Thing is worse for career risk than losing money on it.
In venture, losing money is fine. Everyone loses money. What's not fine is being the one firm that didn't write a check into the category that produced a trillion-dollar company. So they spray, they pray, and they pray some more.
That's why you get 50 AI contract-analysis startups all funded in the same year. Nobody wants to be left out when one of them inevitably survives.
6. Bubble Psychology: The Seduction of Narrative
Bubbles are stories, and humans are wired for stories. AI makes for a hell of a story: machines that think, robots that code, software that eats the world while also writing you a poem about it. The narrative is intoxicating.
Founders pitch it. Journalists amplify it. VCs repeat it to their LPs. Everyone convinces themselves this time it's different. Then gravity does what gravity always does.
So why do we keep getting into bubbles? Because bubbles are a feature, not a bug. They funnel insane amounts of capital into a new technology, most of which gets wasted, but some of which lays the infrastructure for the survivors. The waste looks stupid in hindsight, but it's also how industries get built.
That's why VCs keep investing even when they know the wrappers are doomed. It's not about them all succeeding. It's about funding the chaos until the boring giants emerge.
Which means, yes, half the room is roadkill by design.
⚰️ Closing Credits: Pets.com With a Prompt
Here's the punchline: the AI bubble won't kill AI. It never works that way. The tech is real, the productivity gains are undeniable, and the future is still getting rewritten in code. What dies are the wrappers, the gimmicks, the "AI for everything" startups that thought slapping -powered onto a pitch deck would magically create a moat. The tourists pack up, the VCs rotate into climate tech, and the graveyard fills with abandoned Slack channels.
Meanwhile, the survivors look boring as hell. They don't hold flashy conferences or spam you with "future of humanity" manifestos. They're just there, making money the same way they always have:
The chipmakers. NVIDIA, AMD, TSMC. The shovel sellers of the new gold rush, quietly becoming trillion-dollar behemoths by selling GPUs to anyone with a half-baked dream. They'll outlive every wrapper and look smug doing it.
The cloud landlords. Microsoft, Amazon, Google. They fund you with one hand and send you a bill with the other. No matter who survives, they get paid - which makes them the real house in this casino.
The data hoarders. Bloomberg, Thomson Reuters, medical research networks, legal archives. The ones sitting on proprietary datasets that no open-source model can replicate. Data is gravity; distribution is oxygen. If you don't have either, you suffocate.
The incumbents. Adobe, Salesforce, Shopify. They never had to "pivot to AI." They just added it to the tool you were already paying for. That's how you win quietly while everyone else screams.
The cockroach verticals. AI for medicine, law, logistics, finance. Not trillion-dollar TAMs, just sticky niches with deep moats. They're ugly, unglamorous, and very, very hard to kill.
Everyone else? Pets.com with a prompt interface. Maybe you get acquihired. Maybe you spend six months "recharging" while your investors ghost you. Maybe you pivot into AI-enabled artisanal candles. But you won't be remembered as the foundation of the next decade - you'll be remembered as the punchline of this one.
And that's the real lesson here: AI doesn't die. The bubble does. The survivors don't look like visionaries, they look like accountants. They're boring, unsexy, and relentless. They don't sell hype, they sell infrastructure. And while hype cycles burn out, infrastructure just… sticks around.
So if you're a founder right now, staring down your burn rate and whispering "we're different," ask yourself one thing: when the music stops, are you building Amazon, or are you selling tulip bulbs? Because one of those becomes the backbone of the future - and the other ends up as a sad footnote with a clearance sale on branded hoodies.
Cue the violin, fade to black, roll credits. Sponsored by NVIDIA.