The year is 2024, and the AI revolution is in full swing. From startups to big corporations, from consumers to investors, the fear of missing out on the AI wave is palpable.

The VC Investor Viewpoint: Venture capitalists (VCs) are acutely aware of the potential rewards and risks associated with AI investments. The FOMO here stems from the fear of missing out on the next big AI unicorn. AI startup funding has skyrocketed, with global investment reaching a staggering $50 billion in 2023, up from the $30 billion invested in 2020 and in 2024 we already had almost $7bn investment in AI companie sonly in Januartyu and February together.

VCs are actively scouting for promising AI startups, often willing to take bigger risks and offer higher valuations. The average AI startup valuation has tripled in the last three years alone.

At the same time, they are wary of AI investments that may not pan out or become obsolete due to rapidly evolving AI technologies. This delicate balance between FOMO and due diligence is shaping the AI investment landscape in 2024.

The regions leading the charge in AI startup investments are the United States, China, and the United Kingdom. The San Francisco Bay Area and Beijing continue to be global AI hotspots, attracting the lion’s share of investment dollars and top AI talent.

Even corporates are joining the race and investing money out of their corporate venture arms or directly.

The Consumer Angle: the AI FOMO is driven by the fear…

Businesses across industries are grappling with the AI FOMO… The FOMO here is amplified by the fear of missed opportunities and the potential for AI to reshape entire industries. Global spending on AI systems by enterprises is projected to reach $98 billion in 2024, up from $37.5 billion in 2019, a staggering 161% increase in just five years.

As the AI revolution continues to unfold, the FOMO around this transformative technology is likely to intensify…

Do we learn from the past?

FOMO is not a new phenomenon and we lived quite a few on the financial markets in the past:

The Dot-Com Bubble (1990s to early 2000s):

• During the rise of the internet and the emergence of tech startups, investors and the public experienced intense FOMO, leading to a speculative frenzy and rapid increase in stock prices of companies with unproven business models.
• Many investors, driven by the fear of missing out on the next big thing, poured money into these companies, resulting in a massive bubble that eventually burst, causing significant losses.

The Bitcoin Craze (2017–2018):

• The meteoric rise of Bitcoin and other cryptocurrencies in 2017 triggered a widespread FOMO among investors, both individual and institutional.
• Driven by the fear of missing out on the potential gains, many people rushed to invest in Bitcoin and other digital assets, leading to a sharp increase in their prices.
• However, the subsequent market crash, commonly known as the “crypto winter,” resulted in substantial losses for those who had bought in at the peak of the FOMO-driven frenzy.

The GameStop Short Squeeze (2021):

• In early 2021, the stock price of GameStop, a struggling video game retailer, experienced a sudden and dramatic surge due to a coordinated effort by retail investors on social media platforms.
• Fueled by a sense of FOMO and a desire to challenge the established financial system, these investors piled into GameStop, causing a short squeeze and a massive increase in the stock’s price.
• This event highlighted the power of FOMO and the potential for social media-driven investment trends to disrupt traditional market dynamics.

The SPAC Boom (2020–2021):

• The rise of Special Purpose Acquisition Companies (SPACs) during the COVID-19 pandemic was marked by a FOMO-driven surge in investor interest.
• Investors, seeking to capitalize on the potential growth of these “blank check” companies, rushed to participate in SPAC IPOs and mergers, leading to a flood of SPAC activity.
• However, the SPAC market ultimately experienced a downturn, as some deals failed to live up to investor expectations, leading to losses and a cooling of the FOMO-driven SPAC mania.

FOMO can drive irrational investment behavior, leading to speculative bubbles, market distortions, and significant losses for those who fail to exercise caution and due diligence. The investment landscape is often shaped by the ebb and flow of FOMO, underscoring the importance of rational decision-making and risk management in the face of market hype and emotional biases.

The Startup Perspective: AI is a double-edged sword…

The fear of missing out on the AI revolution can lead to some concerning trends, particularly around raising too much money at excessively high valuations.

AI is kind of a Double-Edged Sword For startups, AI represents a massive opportunity, but also a significant risk. On one hand, companies that can successfully leverage AI to disrupt industries and create innovative products have the potential for exponential growth and valuation. The promise of AI-powered breakthroughs has fueled immense investor excitement. However, this FOMO has also led many startups to raise far more capital than they may need, often at sky-high valuations that are difficult to justify based on real business metrics. Founders, driven by the fear of missing out on the AI gold rush, are accepting term sheets that saddle their companies with excessive burn rates and unrealistic growth expectations.

This dynamic can create a dangerous feedback loop. Startups flush with VC cash feel pressure to “spend to grow” and rapidly scale, even if their underlying business models are unproven. They may overinvest in AI R&D, talent, and infrastructure before finding real product-market fit. And investors, not wanting to miss out on the next AI unicorn, continue to pour money into these startups, perpetuating the cycle. The risk is that many of these AI-focused startups could end up burning through their capital without achieving sustainable success. When the hype cycle inevitably cools, those that haven’t built genuine competitive advantages powered by AI may find themselves in serious trouble. Layoffs, down rounds, and even shutdowns could ensue as the FOMO-fueled bubble bursts.

The most prudent startups will be those that take a more measured, disciplined approach to AI adoption. They’ll strategically invest in AI capabilities that truly differentiate their products and services, while maintaining a keen focus on fundamentals like customer acquisition, unit economics, and path to profitability. These startups are less likely to fall victim to the AI FOMO trap and more likely to emerge as long-term winners in the AI-powered economy.

‘To be or not to be (in), that is the question…’

For investors, the key seems to be to maintain a balanced and disciplined approach amidst the AI FOMO, selectively backing early winners with reliable business models rather than getting caught up in the hype.

Stay Cautious, But Selective: Investors must resist the temptation to get swept up in the AI FOMO frenzy and maintain a critical, discerning eye. While the potential upside of investing in transformative AI technologies is immense, the risks of overvaluation and unsustainable business models are also significant. The most prudent investors will adopt a cautious yet selective approach. They’ll resist the urge to pour money indiscriminately into any AI-focused startup that comes across their radar. Instead, they’ll take the time to thoroughly vet each opportunity, scrutinizing the team, technology, market potential, and — most importantly — the underlying unit economics and path to profitability.

Identify Early Winners with Reliable ModelsL The key for investors is to identify the true AI innovators and industry disruptors — the startups that have developed AI capabilities that genuinely differentiate their products and services. These are the companies that have a clear, sustainable competitive advantage powered by AI, not just a flashy demo or overhyped promises. Reliable business models, strong unit economics, and prudent growth strategies should be the hallmarks of the startups that savvy investors back. While the temptation to chase the latest AI “unicorn” may be strong, those who resist and focus on fundamentals are more likely to generate consistent, long-term returns…