The AI bubble will burst for firms that can’t get beyond demos and LLMs

The AI bubble isn’t just hype — it’s real and could create many corporate casualties if or when it bursts. The companies that will succeed will be the ones solving real-world problems and engaging clients, according to tech industry execs and analysts.

AI startup valuations have skyrocketed, creating the fear of an AI bubble that’s drawn parallels to the dot-com bubble of the early 2000s; in the aftermath of that internet hype cycle, many once-promising companies went under.

Lofty AI valuations have economists concerned about a market correction if the investments don’t improve productivity or produce real-world results. Trade, geopolitical and tariff concerns are also raising further alarms and uncertainty.

Even though the discussion of a potential bubble is ubiquitous, what’s going on is more nuanced than simple boom-and-bust chatter, said Francisco Martin-Rayo, CEO of Helios AI.

“What people are really debating is the gap between valuation and real-world impact. Many companies are labeled ‘AI-driven,’ but only a subset are delivering measurable value at scale,” Martin-Rayo said.

Founders confuse fundraising with progress, which comes only when they are solving real problems for real clients, said Nacho De Marco, founder of BairesDev. “Fundraising gives you dopamine, but real progress comes from customers,” De Marco said. “The real value of a $1B valuation is customer validation.”

The economic impact of AI was a big part of the conversation at last month’s World Economic Forum (WEF), where De Marco participated in a panel discussion called “How High Can Unicorns Fly.”  He stressed that AI lowers the financial and operational barrier of entry for founders starting their businesses.

“You can build something massive without outside capital, but only if your unit economics work. When you bootstrap, your north star is payroll, not burn rate,” De Marco said.

The AI shakeout has already started, and the tenor at WEF “feels less like peak hype and more like the beginning of a sorting process,” Martin-Rayo said.

There are fewer foundational models and more verticalized applications, and companies that can’t translate impressive demos into durable revenue will fall, Martin-Rayo said.

Companies that survive the coming shakeout will be those willing to rebuild operations from the ground up rather than throwing AI into existing workflows, said Jinsook Han, chief agentic AI officer at Genpact. ”It’s not about just bolting some AI into your existing operation,” Han said. “You have to really build from ground up — it’s a complete operating model change.”

Foundational models are becoming more mature and can do more of what startups sell. As a result, AI providers that don’t offer distinct value will have a tough time surviving, Han said.

“There are a lot of companies that just are leveraging foundational models. And I think those will go away. And if we want to call that a bubble, I think that definitely is,” Han said.

In talks with clients, Han has found that many are confused. Tech demos look great, but clients aren’t sure whether AI fits their operating model. “Does it work in my environment? Does it protect me? So that’s where we are. I think there’s that part of bubble for sure,” Han said.

AI’s fundamental unresolved problems, such as hallucinations, are still underappreciated as companies chase valuations, said Deepak Seth, director analyst for Gartner. “Organizations need to be future aware, but they have to be grounded in their past also. You cannot just be chasing the shiny object all the time,” Seth said.The AI bubble will burst for firms that can’t get beyond demos and LLMs – ComputerworldRead More