‘The latest example of FOMO investing’: Why the Builder.ai collapse should be a turning point in the age of AI hype
The collapse of Builder.ai is shocking, but not exactly surprising given the hype surrounding the technology
When the house of cards came tumbling down for Builder.ai, it may have shocked some industry stakeholders, but for others it was a sign of an inherently broken ecosystem.
The high flying startup was one of a number of companies looking to capitalize on the generative AI boom, particularly the use of the technology in software development.
The profession has seen an influx of AI tools over the last 18 months, and this is now a booming marketplace, with industry giants battling it out over who can deliver the most value for engineers and devs, and most importantly, drive productivity.
Builder.ai was, arguably, among the pick of the bunch in this regard. Founded in 2016 and formerly known as Engineer.ai, the company offered AI-powered tools that allowed users to create applications with little or no coding expertise.
With the generative AI gold rush gaining momentum in late 2022 and early 2023, the company had suitors scrambling to get involved. It raised over $450 million in funding, including from big-name investors like Microsoft and Qatar's sovereign wealth fund.
So, where did it all go wrong? In May, a viral tweet accused the company of hiring a 700-strong army of engineers in India to basically carry out the legwork that the so-called ‘AI’ was supposed to be doing.
The company strongly disputes this claim, and there’s little evidence to suggest there’s any credibility in the accusation.
It’s worth noting that a 2019 report from the Wall Street Journal claimed the startup admitted to using human engineers, rather than AI, to carry out coding tasks.
Notably, the WSJ report mentioned that employees at the firm said the company exaggerated its capabilities in a bid to attract both customers and investors.
It appears that the grandiose claims bandied around by the company continued after its rebranding, but the real damage lay in the numbers, not the tech.
According to reports from the Financial Times, the startup is believed to have “overstated sales by as much as four times” and was facing serious debt problems.
The FT reported that the firm owed Amazon Web Services (AWS) $88 million and Microsoft around $30 million, for example.
Meanwhile, separate reporting from Bloomberg revealed a lender seized $37 million after finding it generated $50 million in revenue. That’s by no means a measly figure, but that stands 300% lower than the firm’s claim of a $220 million revenue stream.
The Builder.ai collapse is an indictment of the industry
Carrie Osman, CEO of private equity advisor, Cruxy, said the startup is the “latest example of FOMO investing”, whereby venture capital firms and industry stakeholders alike rush headlong into throwing money at companies.
Ultimately, it’s an indictment of the state of the industry and the hype surrounding the technology.
“Technology like GenAI has been massively overhyped in recent years, and investors and boards are under increasing pressure to find the latest, sexiest uses for AI,” Osman said.
“Driven by FOMO rather than fundamentals, investors are rushing into deals with minimal scrutiny, inflating valuations, and sidelining due diligence.”
The hype saturating this industry has sparked some concerns in recent months, particularly over the viability of many startups emerging in the space.
Indeed, a report from Silicon Valley Bank (SVB) in May issued a warning over the rise of ‘zombiecorns’ in the ecosystem.
These are essentially startups that raise huge sums of money but fail to build sustainable revenue streams. Fresh on the high of a major fundraise, many of these companies actually prove to be chronically unprepared post-funding.
The combination of high infrastructure costs, sluggish revenue growth, and the incessant demand for a quick return on investment (ROI) means a concerning portion of companies in the AI space are destined to fail.
Many of these failing startups seemingly fly under the radar without so much as a headline - and it’s largely due to the sheer amount of cash pouring into the space, which, it has to be said, is being driven by the leading industry figures banging the drum for the technology.
Analysis from the bank shows around 40% of all investment raised by funds last year came from those that “list AI as a focus”.
Compare that to 2021 where just 10% of venture capital investment went toward AI startups, and it shows many investors are willing to take the chance on investing in firms that are essentially just enterprise software with a shiny AI wrapper.
Make sure to follow ITPro on Google News to keep tabs on all our latest news, analysis, and reviews.
MORE FROM ITPRO
- Why the UK keeps losing promising startups
- The UK's AI sector is booming – but can the country hang on to its startups?
- Building a Generative AI Product for Startup Founders
-
Cisco sounds alarm over new Russian malware campaign hitting firms in US and EuropeNews UAT-11795 is weaponizing legitimate software such as WebEx and Zoom to dupe victims
-
Why doesn't more data produce better results?ITPro Podcast Riverbed CIO Fernando Castanheira talks about data and how businesses can use it better
-
‘A company should be able to use a model without giving up the knowledge that makes it unique’: Microsoft CEO Satya Nadella says enterprises shouldn’t be sharing so much data with AI providersNews The Microsoft chief warned that corporate data could be at risk thanks to AI models
-
‘What we’re seeing right now is just rapid escalation in AI token spend’: Accenture tells staff to stop using AI for unnecessary tasks amid surging costsNews Accenture has told some staff to roll back the use of AI for basic tasks while the consultancy grapples with surging AI token costs.
-
‘The claims in the suit are false’: Workday hits back amid lawsuit claiming AI recruitment discriminationNews Is AI hiring discriminatory? A California judge has given the go-ahead for a class action suit against Workday
-
IT leaders are being stung by "unexpected" AI costsNews The growing costs associated with AI are hitting organizations large and small
-
'Botsitting' is destroying productivity as workers spend nearly a full day each week making AI 'usable'News While workers are reporting productivity improvements, ‘botsitting’ means these are often negated
-
'Most enterprises are still unprepared to operationalize it': IT leaders are bullish on agents, but keeping falling at the final hurdle – here's whyNews Forrester points to challenges scaling agentic AI, saying companies start rolling out the tech before they're ready to scale
-
‘Chat is dead’: OpenAI plots ChatGPT ‘super app’ overhaul ahead of public listing – with agents and coding tools the new focusNews The company looks set to spruce up ChatGPT with a particular focus on agents to drive subscriptions
-
Uber’s eye-watering AI bill shows enterprises are ‘still measuring AI success through consumption rather than outcomes’ – and it's warping our perception of ROI and productivityNews ‘Tokenmaxxing’ might pad the stats, but it’s a trend that could come back to haunt enterprises
