The Rise of AI 'Neolabs': Billion-Dollar Valuations Without Products or Revenue
In a remarkable shift within the technology investment landscape, a new breed of artificial intelligence startups, dubbed "neolabs," is capturing the attention of venture capitalists with billion-dollar valuations despite having no commercial products or revenue streams. These entities prioritize long-term research and the development of novel AI models over immediate profitability, challenging traditional startup paradigms.
From Academic Labs to Venture-Backed Research Hubs
The trend gained momentum as investors seek the next OpenAI, which originated as a research lab before evolving into one of the world's most valuable startups. Ben Spector, a 25-year-old Ph.D. student at Stanford University, exemplifies this movement. Last fall, he pitched investors on Flapping Airplanes, a lab focused on training AI models with biological inspiration from nature, without a traditional pitch deck or plans for near-term monetization.
Venture-capital firms eagerly backed his vision, leading to a $180 million funding round at a $1.5 billion valuation from prominent investors including GV, Sequoia Capital, Index Ventures, and Menlo Ventures. Spector, who took leave from his Ph.D. program in September, argues that small teams of brilliant young researchers approaching problems innovatively are poised for success in the AI arena.
Skyrocketing Valuations and Investor Enthusiasm
While the exact number of neolabs is estimated to be in the dozens among over a thousand billion-dollar startups, their valuations have soared into the tens of billions. Notable examples include Humans&, which raised $480 million at a $4.48 billion valuation to develop AI systems for human collaboration, and Reflection AI, securing $2 billion at an $8 billion valuation for open-source model development.
Periodic Labs launched with $300 million in funding to automate scientific research, and Safe Superintelligence, founded by OpenAI co-founder Ilya Sutskever, has raised $3 billion at a $32 billion valuation with the singular goal of building safe superintelligence. Sutskever emphasized on a podcast that he is investigating promising ideas without guarantees of breakthroughs or revenue, signaling a return to an "age of research" in AI.
Challenges and Skepticism in the Neolab Ecosystem
Despite the investor frenzy, critics highlight significant hurdles. Ashu Garg, a general partner at Foundation Capital, warns that the technical challenges are substantial, with most neolabs likely to achieve only incremental improvements rather than transformative breakthroughs. Talent retention poses another major issue, as tech giants offer multimillion-dollar packages to lure AI experts.
Thinking Machines Lab, co-founded by former OpenAI executive Mira Murati, faced dramatic founder departures to OpenAI and Meta, underscoring the competitive talent landscape. The company is now seeking additional capital that could value it at $50 billion, but such losses have prompted investors to scrutinize founders' motivations more closely.
Strategic Recruitment and the Youth Advantage
To navigate the talent war, neolabs like Flapping Airplanes are recruiting young researchers who might otherwise pursue academic careers or roles at quantitative firms. With 11 employees, including an 18-year-old high-school student and a 21-year-old Thiel Fellow, the lab leverages advisors like AI legends Andrej Karpathy and Jeff Dean. Investors express enthusiasm for this approach, with Sequoia Capital partner David Cahn noting that historically, groundbreaking science often emerges from individuals in their mid-20s.
Impact on Academia and the Future of AI Research
The neolab boom is drawing promising students away from academia, leading to concerns about training the next generation of researchers. Stefano Ermon, a Stanford University computer-science professor, observed unprecedented turnover in academia and raised $50 million for his neolab, Inception, focused on diffusion models for text and code generation. He described the current moment as a unique opportunity with immense upside, emphasizing that it's "now or never" for such ventures.
U.S. AI startups raised a record $222 billion last year, according to PitchBook, with an increasing number of researchers pitching neolabs. However, the sustainability of this model remains uncertain, as the ease of raising venture capital may not last indefinitely. As the AI landscape evolves, these neolabs represent a bold experiment in blending deep research with entrepreneurial ambition, reshaping how innovation is funded and pursued in the artificial intelligence domain.
