As AI hype soars, VCs are tussling to figure out what’s real and what’s an illusion

Arthur C. Clarke’s best-remembered law states: “Any sufficiently advanced technology is indistinguishable from magic.”

Which, of course, poses a challenge to tech investors. When a nascent technology like AI rockets to prominence, investors must catch up, and learn to be discerning. But how do you tell the difference between a truly magical technology, and a run-of-the-mill parlor trick?

“I’ve made a joke before that last year everyone spent, I don’t know, $59 on GoDaddy to change their URLs to dot-AI,” said Julia Gudish Krieger, Pari Passu Venture Partners managing partner. “But the word AI in your pitch deck isn’t going to make the difference whether you raise money or not. Companies have to be dramatically changing their respective industries with their use of AI, not as a superficial add-on.”

“We’re in the early days of AI's Wild West Era, where there are seemingly an infinite number of ways we can apply the technology to so many different pain points,” said Meera Clark, Redpoint Ventures principal. “But the risk with many of these 'shiny' early applications is that they end up being one-time use case problems, making them harder to underwrite as true venture scale opportunities.”

Amplitude chief product officer Francois Ajenstat has developed a skepticism of companies that lead with "AI" in the headline or pitch rather than focusing on the actual problem being solved.

The VCs I spoke with described a few useful filters for assessing startups in this AI moment, such as ensuring that data will be a key differentiator, that demos and details are vital, and that the AI company has a clear path to profitability beyond simply riding the AI hype wave. But truthfully, when I started reporting this story I hoped to get more answers. There's a lot we just don’t know—except that the best AI deals are viscerally competitive processes right now.

“The reality is everyone is trying to figure it out, nobody knows,” said Eva Ho, Fika Ventures general partner. “And while the power is currently resting on a concentrated number of investors closest to the action in the Bay Area, we expect the influence and impact of AI will become more diffuse over time .”

Silicon Valley has long thrived on ambition and the notion of game-changing innovation, of course. And the fine line between an entrepreneur with a bold-but-not-quite-there-yet vision and someone purposefully seeking to mislead is all the more tricky to distinguish when it comes to AI. But many of the folks I spoke to were willing to extend the benefit of the doubt to the parade of AI-touting startups, even those with grandiose claims.

"I wouldn't call them grifters, and there’s a reason for that—I think there are people who really authentically want to build something interesting, and they may just not totally get there,” said EY Global Chief Innovation Officer Jeff Wong.

There are even times when the grift—accidental or otherwise—turns out to be real anyway. Johannes Gutenberg was actually a con artist, attracted to get-rich-quick schemes before inventing the printing press. He was a grifter, who stumbled upon something real.

In a year or 18 months, we may start to see these companies get stress-tested, as the technology evolves and its resilience is revealed.

Perhaps, the nearest way that technology is like magic is what happens when the trick is revealed: When you know how it’s done, one of two things happen.

Either the trick turns out to actually be even more impressive than it seemed before, and—as with the hardy performer who swallows glass or breathes fire—the magician rises in your estimation.

Or the secret is underwhelming. And if the trick is easy enough to replicate by another, then why bother with this magician?

And speaking of AI...My colleague Rachyl Jones has the exclusive on Scale AI founder Lucy Guo’s latest venture, creator monetization platform Passes. Read more here.

Elsewhere…Who wants to talk about 2021 valuations, in the cold light of day that is 2024? Most of you out there probably don’t, but when it comes to private equity dealmakers—we’re starting to see early signs of that year’s winners and losers, and my colleague Luisa Beltran has the story.

See you tomorrow,

Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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This story was originally featured on Fortune.com