Is AI a Bubble? Why We're Betting on the Installation Phase
by rchachra | 2025-12-11 01:23:21+00:00
If you talk to allocators right now, the conversation eventually lands on the same question: “Is this a bubble? And if it is, why are we deploying capital?” It is the right question. And for me, it’s personal. I’ve lived through this movie before. I founded a mobile wallet startup during the dot-com mania, riding the wave of euphoria. Years later, I ran a distressed debt hedge fund through the Global Financial Crisis, sifting through the wreckage when the music stopped. Today, as a YC founder myself (Vantedge AI) and GP at Eight Capital (230+ YC investments), I see the current cycle from the inside. We are seeing the same patterns today: enormous capital spend and narratives swinging between “this changes everything” and “this ends badly.” In a recent memo, Howard Marks introduces a distinction that frames my thesis: Mean-Reversion Bubbles: Financial fads (like subprime) that inflate asset prices without fundamentally improving the world. These end in value destruction. Inflection Bubbles: Periods where a transformative technology (railroads, internet) gets massively overbuilt. These bubbles destroy investor capital in the short term, but permanently raise productive capacity. My take: AI is almost certainly an Inflection Bubble. It will change the world, but it will incinerate capital along the way. Here is how we are navigating it. 1. Two Bubbles, Not One Marks distinguishes between a "company behavior" bubble (hyperscalers, GPU build-outs, debt) and an "investor behavior" bubble (pricing, lottery-ticket thinking). We don't fund trillion-dollar CapEx. Our strategy is to: Invest in the Application Layer: We back early-stage software companies that consume AI infrastructure not build it. Small, Diversified Checks: We enter pre-Demo Day. We avoid the valuation distortion of late-stage rounds. If the AI infra build-out turns out to be overbuilt, the pain sits with those financing $5T of data centers—not with a YC startup using that cheap compute to sell workflow automation to banks. We are not trying to be the next Nvidia; We are backing the founders building on top of it. 2. Installation vs. Deployment Technological revolutions begin with an Installation Phase—a mania of over-investment that lays the rails. This phase is chaotic and prone to crashes. It is followed by the Deployment Phase: the profitable period where the new technology is embedded into the economy. We are biased toward Deployment. Our portfolio companies don't need the world to be perfect for AI infra valuations. They just need customers with real problems and willingness to pay. As the "Installation Bubble" overbuilds capacity, our companies benefit from better unit economics. 3. Avoiding the Casino Having navigated the GFC, I have a deep aversion to behaviors that end in tears: Lottery-Ticket Thinking: We avoid betting on massive outcomes with near-zero probability. I don't need a single company to return the fund; We aim for a high hit rate of solid businesses. Pre-Product Mega-Rounds: We do not participate in very high priced "seed" rounds for companies with no shipped product. 4. YC as a Narrative Filter In a bubble, capital floods into weak teams with good stories. While no filter is perfect, YC comes close: Selection: Screens thousands down to the top ~1.5%. Discipline: The 3-month batch forces founders to ship product, not just slides. Data: Having invested across 11+ batches has enabled us to spot real traction vs. noise. Conclusion I hold two competing thoughts at once: "AI enthusiasm will almost certainly overshoot." "AI is one of the most important technology shifts of our lifetimes." Our job isn't to predict when the bubble pops. It is to avoid being the marginal dollar funding the excess, and instead ensure we own a basket of companies that will define the next decade. We are not betting on the bubble. We are betting on the builders.