The Prof G Pod with Scott Galloway - No Mercy / No Malice: AI Laundromat

Episode Date: June 22, 2024

As read by George Hahn. https://www.profgalloway.com/ai-laundromat/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. I'm Scott Galloway, and this is No Mercy, No Malice. One sign that the business cycle has reached a full bubble? When companies begin washing their brands in the flavor of the moment. Right now, that flavor is AI. And predictably, just about every company wants the market to believe it's an AI company. AI washing, as read by George Hahn. I'm at Cannes, hungover, as I went to Yahoo Beach and saw the Chainsmokers.

Cannes is everything I wanted in my 20s and 30s but didn't have access to, since I was working all the fucking time and had no money or influence. Better late, I guess. Anyway, the two biggest stories of this year's Cannes Advertising Conference will be, one, the Musk-Iaccarino apology tour, which received a slightly cooler reception than if Milli Vanilli showed up at Spotify Beach. No, Elon, really, you can go fuck yourself, says the ad community. Two, my friend Michael Kassan hosting the kickoff dinner for C3, his new firm, on the terrace overlooking the party for MediaLink, his former firm. Pro tip, CEOs with ovaries don't do this shit. The definition of a dick move.

I said this verbatim on a panel with Michael yesterday, and he responded, you mean a big dick move. But I digress. The best founders articulate a vision of the future and put their company's business model at the heart of it. It's no different from Hollywood. The sets and costumes change, but the promise of a utopian or dystopian future is a constant. By the way, the headline that best depicts our world would be, on average, things modestly better today, globally. But that's click repellent. Ironically,

the hot movie trends seem to be biopics about business, specifically successful products. Studio execs recently greenlit movies about Blackberry, Tetris, the Air Jordan, and presumably after edibles, spicy Cheetos and Pop-Tarts. As the financialization of everything, which has CEOs signing breasts, becomes a Category 7 hurricane, expect an onslaught of movies about AI as uber-villain. In the latest Mission Impossible installment, Dead Reckoning Part 1, the villain is a sentient AI entity called, wait for it, the entity. I'm working on a film myself, and given my Hollywood career, it will be in theaters soon. Maybe.

In America, money is relevance. And the most relevant thing in the world is now a firm that designs GPUs. NVIDIA has registered the greatest market cap growth in history, $2 trillion in the past year alone, becoming briefly the most valuable company in the world as its chips are the literal heart of the AI revolution. No storytelling required. I appreciate that the folks from NVIDIA don't come to CAN, unlike Google and Meta, to run their fingers through the hair of media execs before shooting them in the face. My favorite CAN moment? Cheryl's 2013 book signing, which attracted hundreds of female execs even as her firm was depressing millions of teen girls. Back to NVIDIA. Think about this. One company has added the value of the global auto industry and the GDP of Sweden

in 12 months. OpenAI and by extension its sugar daddy, Microsoft, are similarly benefiting. But investor hunger for AI stories can't be sated by a few businesses. CNBC makes an annual list of the 50 most disruptive companies, and two-thirds of the entrants on the 2024 list, quote, describe artificial intelligence as critical to their businesses, unquote. The key word in that sentence is describe. Every comms exec and CEO who can spell AI, i.e. all of them, has decided AI is the protagonist of their company's story. However, similar to Game of Thrones, a lot of these leading men and women aren't going to

make it to season two. Which brings me to Tempus. I mean, Tempus AI. Tempus is a genomic testing and data company. Doctors take blood or tissue samples from patients and send them to a Tempest lab, and Tempest sends back information about the genes it finds in those samples. In addition to testing, Tempest licenses the data it collects to pharmaceutical companies who use it to develop drugs. Tempest specializes in cancer, which is a great business, as fighting cancer is a noble thing. AI, healthcare, cancer, disco. I emailed the CEO, whom I sort of know, strikes me as an impressive guy, and asked if I could invest.

He said they're only letting institutions invest. Makes sense. I was still interested, however, so I looked further into the firm. Read, I asked my team to look into the firm. And here's what we found. It's not such a great business in the sense of making money. Tempest doesn't make money. It burns it. Since its founding in 2015, the company has raised $1.5 billion in venture money

and spent almost all of it. According to its IPO filing, Tempest had $80 million left in the bank on March 31, and it was burning $8 million per week, suggesting it would run out of cash last week. The company raised an additional $200 million from SoftBank in late April, otherwise it might not have made it to the IPO. I'm wondering when the CIA is going to plant SoftBank, Chamath Palihapitiya, and Cathie Wood in Moscow to take the Russian economy down. Tempus AI stumbled across the IPO finish line and fell into a pile of money.

It priced at $37, opened at $40, and hit $44 before settling at $38, giving the company a $6 billion market cap after a day of trading, a respectable IPO bump, and a check for $411 million, aka a year of burn. The valuation was down from Tempest's private market valuation of $8 billion, but an 11x revenue multiple is still greater than that afforded its competitors, such as Guardant and Neogenomics, which trade at 6x and 2.7x, respectively. Guardant welcomed Tempest to the public markets with a patent lawsuit three days before the IPO. See above. Dick move. How did a money-losing business facing a patent lawsuit in a competitive market run by a guy whose previous company, Groupon, trades at 6% of its IPO valuation after burning through $1.5 billion of investor capital garner a multiple nearly double that of its most richly valued competitor?

A. Never underestimate the market's ability to provide a product or story when people have cash in hand. In this instance, it will likely again be investors who get beamed in the face. Tempest refers to AI 228 times in its IPO paperwork, even tacking those letters onto the end of its name last year. Notably, the company first filed for an IPO in 2021, and back then it mentioned AI 78 times. The AI hype refers to the third leg of Tempest's stool, its AI applications product line. The idea is that Tempest will combine its lab testing with a comprehensive review of a patient's entire record,

other test results, physician's notes, family history, medications, etc., and provide recommendations for patient care. An AI doctor, which sounds amazing, but it's also sci-fi, i.e. fantasy, which it is because the AI applications segment currently provides 2% of the company's revenue. Tempest hasn't had time to add AI to its logo, and the only part of its website that incorporates the new name is the Investor Relations section. The S1 reads like a venture capital pitch deck written by an LLM with the following prompt.

Pull together a 30-minute slide presentation for an IPO roadshow that positions us as an AI firm. Second prompt, more cowbell, if cowbell is AI. I can't decide if I should criticize Tempest or commend it. The market wants AI companies, Tempest wants the market's capital, and it pairs the trade via AI washing. Everybody's doing it, and the company's ability to attract cheap capital may provide the steroids to turn it from Carl Lewis to Ben Johnson. Tempest AI isn't the first company to play the name game. C3.ai started life as regular C3, had a cup of coffee as C3 Energy, and jumped on the Internet of Things bandwagon as C3 IoT before going public as C3.ai. In the UK, the largest domestic energy company, Octopus, has jacked its valuation nearly 2x since 2001, and its CEO can't stop talking about AI.

Starbucks is using AI to nurture the human spirit. Kellogg awards an MBAI business school degree. At my online ed startup, Section, we offer an AI academy, but we haven't changed the name to Section.ai, although GoDaddy is selling the URL for just $798,888, a small price for a 2x valuation bump. Even actual washing machines are in on the game. LG introduced an AI-powered washing machine in 2020. Goldman bankers bring a washing machine to every roadshow. We've been here before, and the cycle always turns. Most recently, it was crypto and the NFT-ification of everything. The dot-com boom

in the late 90s saw the launch of businesses including drcoop.com, the website of former Surgeon General C. Everett Coop, which popped 38% on its NASDAQ IPO before going under in 2001. There are some signs the golden age of AI washing is slowing from the spin cycle coming to an end. Regulators are paying attention. The SEC hit two investment advisors with six-figure fines for falsely claiming to use AI in their financial forecasts. And the agency's enforcement head made it clear this was a warning shot for publicly traded companies.

Quote, Public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals' investing decisions, unquote. The SEC also brought fraud charges against defunct recruiter Junco, which claimed to use AI to identify diverse applicants, but flamed out last year when its founder was revealed to have inflated its numbers and concocted fake testimonials. The FTC wants companies to know that it's watching their AI claims, and the FDA is looking into regulating

the use of AI models in healthcare. The market's favorite citizen sheriff, Hindenburg Research, recently pointed at short-selling guns at Equinix, accusing the data center provider of selling an AI pipe dream. Tempest AI's IPO may be the latest signal that the AI washing cycle is ending, as its modest pre-orchestrated pop has evaporated. And C3.ai's stock is already off 80% from its post-IPO high in 2021. The line between AI opportunity and AI washing is neither clear nor fixed. Sure, it's obvious for the outliers. NVIDIA will continue to register upside powering AI, and shady brokers who claim to use AI to pick stocks will not. But for most firms, clarity will only come with hindsight.

Ironically, a year ago, the big story was how to detect if someone was using AI. News stories, student papers, lawyers. Today, we're attempting to discern if a firm is not using AI. Life is so rich. you