AI Boom Stems Tech’s Downturn

Vinay Wagh’s venture is one. He decided earlier this year that this was the moment to launch a new company.

He left a job at data-storage company Databricks to create a startup aimed at helping businesses incorporate generative artificial intelligence. Since then, he has been aiming to poach tech veterans from established firms and raising venture capital that had seemed to be largely idle amid the gloom that overshadowed much of Silicon Valley.

“This tech wave is here” before the last one has wound down, Wagh said.

In the winter, the industry looked like it might be headed for an extended and painful slump. Tech titans were emphasizing efficiency and laying off tens of thousands of people. The Nasdaq Composite Index had lost more than 30% in 2022.

But enthusiasm over AI has exploded among investors, executives and technology users since the startup OpenAI late last year unveiled ChatGPT, a bot that can converse in humanlike language. The fervor has put something of a floor under the descent the industry was experiencing, leading the downturn to play out differently than previous ones.

Despite slowing revenue growth, top tech stocks have rallied this year. Microsoft, which has invested billions in OpenAI, has promoted itself as being at the vanguard of AI, adding the technology to everything from its Bing search engine to its workplace software. Google, a longtime leader in the space, has released several search features built on generative AI.

The Nasdaq has risen 32% this year—the Dow Jones Industrial Average is up 3.4%—while Microsoft shares have climbed 41% and Nvidia shares have almost tripled on the back of optimism that AI will bolster their businesses.

Companies that had been touting their cost-cutting and apologizing for hiring too many people in recent years have been adding to the excitement by broadcasting their AI ambitions. Of the S&P 500 companies with earnings conference calls from the middle of March to late May, 110 mentioned AI, according to FactSet. That is a record high and around three times the 10-year average.

Spencer Kimball, the CEO of database startup Cockroach Labs, who has been helping build technology companies for decades, said previous periods of pessimism festered longer. In the dot-com bust of 2000 when tech stocks crashed, it seemed the freeways from San Francisco down to Silicon Valley went from clogged to clear nearly overnight, he said. And in 2008, as the financial crisis was taking hold, he said, capital fled from the tech industry and companies stopped hiring for a longer time.

In this rebound within a downturn, investors are hoping the new startups are more efficient than the previous generation because they require less initial investment in infrastructure and can do with smaller teams. Optimists say that with AI automating many jobs, the companies can remain lean and achieve profitability sooner.

“It’s easier to run a company on a shoestring budget than it’s ever been,” Kimball said.

Over the past eight months, many companies have been whipsawed as investors have been pressuring them to get more profitable, resulting in a wave of layoffs. Google-parent Alphabet, Amazon.com, Facebook-parent Meta Platforms and Microsoft cut thousands of workers. Smaller, unlisted tech firms, such as payment-processor Stripe, also trimmed staff.

The downsizing at those companies—and malaise among employees—has ended up providing a lift to new AI ventures. Many of the startups were founded by or staffed by employees who left or were laid off from leading tech companies.

“Really good people have left companies as part of layoffs,” Wagh said. He started his company with a fellow Databricks employee and an executive who left LinkedIn. “Startups have access to talent they haven’t had before.”

SoftBank Group Chief Executive Masayoshi Son said last month that he plans to end a lull in investing and focus on AI after the ChatGPT chatbot rekindled his excitement about the future. “The time is approaching for us to go on the counteroffensive,” Son said at the annual meeting of the Japanese technology-investment company. “I want SoftBank to lead the AI revolution.”

AI companies have even given a bit of a lift to the bleak San Francisco property market. Chris Roeder, a lead broker for Jones Lang LaSalle, said a lot of AI companies are using the renters’ market to lock down office space. Many want to be in the Mission District and adjacent areas, a part of town that was popular with tech employees during the last boom.

AI optimism isn’t a panacea for all that ails the technology economy. Real estate in San Francisco is still in a historically dire state. Many companies are still stuck in a slowdown, cutting costs and struggling to raise money.

Some of the startups that have raised money during the boom funding years will likely go bankrupt, said Prateek Alsi, a partner and co-head of the venture team at investment firm Tribe Capital. There will still be a “massive reckoning,” he said, for companies that need money but have failed to deliver a path to profitability.

Still, compared with how things looked even a few months ago, the outlook is decidedly brighter.

“It would have been more of a winter,” without the AI boom, Alsi said. “AI saved some level of innovation in the valley and the trough would have been deeper.”