On Bubbles and Waterfalls by Alicia Castillo Holley, PhD

Tampa, FL - May 21, 2024. Generative AI is infiltrating all forms of human interactions, and Silicon Valley is inundated by an unstoppable flow of capital into AI-related investments. The trend follows previous historical speculative bubbles, potentially leading to significant (financial) risks, whilst, at the same time, funding changes in the way we live, work, and care for our planet. Generative AI is here to stay, not without its challenges.

It is evident that the unwarranted optimism can have dire consequences. In the dot.com bubble $5T in market value was wiped out, followed by the subprime crisis, which resulted in $10T in losses, yet we all got used to using internet and the massive adoption of the technology opened up innumerable opportunities despite the financial losses.

As with the dotcom bubble, unsophisticated (or previously lucky) investors, fail to do a proper due diligence and understand the sound business principles that Silicon Valley usually ignores. Entering Q2, overvaluation and oversubscribed rounds in AI are the norm in any company that attaches AI to its strategy. New AI focused VCs, led by emerging overly optimistic GP and filled by similarly overly optimistic LPs are filling the offices as fast and exuberantly as the California poppies that fill our hills after this unusually rainy winter.  After years of dry powder, where VCs withheld investments, forcing companies to either close or dramatically reduce growth and costs, capital is flowing again, now in the direction of generative AI driven by the success of Open.AI. Several more sophisticated investors express caution, yet how could a GP resist a large check from a HNWI (High Net Worth Individual), family office or institutional investor that has AI as its only consideration?

With a low operational barrier to entry, AI companies can be built on software without supply chain challenges. AI built on bad data will be disastrous, yet few investors seem to properly analyze it. It is easy to obviate the potential challenges of data biases. For example, in one of my key areas of investments, health-tech, data is mired by stereotypical conclusions that are not accurate. Doctors' conclusions and recommendations are notoriously impacted by decades of discrimination and misunderstanding, in which case generative AI will only perpetuate these inaccuracies causing not only direct damages to patients and the health care system in general, but also will open up ethical and legal considerations, yet to be resolved. The same principles apply to retails, e-commerce, entertainment, accounting, fintech, SaaS, energy, and other industries. At the same time, privacy and intellectual property considerations are not fully understood and will be regulated, but we do not know how. The orange economy has already been impacted by AI-generated creativity, built on top of existing software or digital assets whose intellectual property needs to be defined, and probably protected in a different way.

Generative AI investments are likely to experience few (certainly irresistible) up-rounds, followed by a correction phase, with inevitable closures, lay-off, down-rounds, low-valued acquisitions, and readjustments. Only the companies with sound business principles, proprietary data, insight analysis, and frictionless interactions with other human activities will survive. Even from those who survive, only few will thrive. What investors are missing are the great opportunities that lie in the next massive wealth waterfall, built quietly over the last two years of dry powder.

The conditions could not be more favorable to VC-backed companies that survived the past four years. In 2020, these companies were able to adapt quickly to covid restrictions, reducing costs and reorganizing priorities. In 2021, a surge in VC investments led to overpriced and oversubscribed rounds and a clear mandate to grow fast. Most of these rounds were price rounds. The next two years, 2022 and 2023 were characterized by a VC freeze, providing much needed reality check for us investors. As VC-backed companies adjusted to the new reality, they continued to adjust costs and priorities now shifted from growth at all costs to break even. Most of the rounds in 2022 were bridges in convertible notes or safes and in 2023 we saw down-rounds in price rounds, as well as extensions in convertible notes and safes. Leadership at the companies who survived the dry period built better companies, with healthier expectations for employees, better cost structures and more focused strategies. At the same time, these companies established stronger ties with investors that supported them in the rebuilding phase. In conclusion, companies now raising a series A to C are poised to be in an ideal situation for acquisitions in 2-3 years. They have adjusted to Covid-related challenges, hybrid work environments, high cost of capital, and the use of AI. In most cases, they are not impacted by the AI frenzy and still have terms that are favorable to investors yet healthy for founders and executive teams.

A massive wealth waterfall, however, is not limited to the amount of value these emerging companies can create, but also to the synergy with existing corporations that will benefit from acquiring these companies in the next few years. According to PWC, new revenue streams in the next three years is the top priority for 52% of corporate CEOs. https://www.pwc.com/us/en/library/ceo-survey.html

That growth is likely to come from acquisitions. For the past four years, corporations have been focusing on survival mood: trade wars and political issues; covid-related challenges in the work force and supply chain disruptions; unforeseen increase in the cost of capital and inflation; risk of recession; stock value drop and stock purchases; and AI adaptation. All of these areas of focus were essential to their survival or profitability, yet none will drive growth. In order to remain competitive, however, these corporations must generate new products and services, faster and better than their competitors. As the AI bubble is building up, the massive waterfall for early-stage investors (and founders) is also building up.

The acquisition market, in two verticals: life sciences and climate, clearly is ready to execute after the US election. Corporations have cash to deploy and urgency to execute driven by competition. In the case of life-sciences in general, the patent cliff is fast approaching, and cash-rich corporations must compensate for a drop in earnings due to patent expiration by acquiring companies that have been developing new technologies or processes for the past 5-10 years. Corporations will also seek to acquire companies to reduce competitor’s growth.

The combination of the AI bubble and the tech waterfall will certainly have a lasting impact in savvy investors recognizing the differences between the two.


CEO & Founder, Wealthing VC Club
CEA Senior Advisor, VC & Ent

Dr. Castillo Holley is a thought leader in Venture Capital. Silicon Valley based, she is a very active post-seed investor with almost 90 companies in her portfolio, including 12 VCs. She runs the Wealthing Group, which includes an investment club for accredited investors (wealthing.club) and the growth fund for institutional investors and family offices (wealthing.vc). Both companies invest in post-seed rounds in life sciences, climate/energy and mobility.

Castillo Holley is credited with launching the early stage private investments in Chile, where she lived between 1996 and 2002, starting the country’s first Center for Entrepreneurship and first seed capital fund. Prior to that she worked as an academic and later led product development at Bayer/Shell joint venture, also coordinating private-public partnerships in the agrochemical industry.

She mentors emerging VC managers and family offices in venture capital investments; and assists in increasing board diversity worldwide. Philanthropically she supports organizations that provide food access, including Box of Life, a non-profit cofounded with her daughter.

Her education spans three continents graduating from the University of Western Australia receiving a PhD in Finance and Entrepreneurship, an MBA in Entrepreneurship from Babson College, and an MSci in Biotechnology and Engineering from Universidad Central de Venezuela. Additionally, she is a graduate of the Australian Institute for Company Directors.

About CEA

Founded in 1973, CEA is a leading provider of investment banking services. With a team of experienced personnel worldwide, CEA has an unequaled depth and breadth of industry knowledge, expertise and long-standing industry relationships. CEA has completed over 1,000 transactions totaling over $60+ billion in more than 60 countries. CEA’s reputation and track record of success are built on delivering innovative, value-added solutions and services to clients worldwide. CEA Atlantic Advisors, LLC is a FINRA Registered Broker-Dealer and a member of SIPC.


Alicia Castillo Holley

CEA Senior Advisor, Venture Capital & Entrepreneurship


J. Patrick Michaels, Jr.

Chairman & CEO


Complete the form below for a confidential consultation
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.