Sridhar Vembu cautious on AI investment, warns of VC-driven spending bubble

Zoho founder Sridhar Vembu has voiced caution over the sustainability of the artificial intelligence (AI) investment boom, highlighting concerns that a substantial portion of industry spending is being driven by venture capital (VC)-backed companies rather than businesses generating consistent profits.

Responding to a post discussing the quality of AI revenues and the concentration of spending among a small number of companies, Vembu said Zoho would continue investing in foundational AI research and development but would hold off on major infrastructure investments until market conditions become more stable.

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The discussion referenced American venture capitalist Chamath Palihapitiya and the broader question of whether the AI industry’s rapid revenue growth reflects durable demand or an investment cycle fuelled by private capital.

“As a rule, we have stayed away from monster-bets-on-other-people's-money approach to business. We are investing in foundational R&D in AI but will await a less bubblicious time to invest in infrastructure,” Vembu responded to Palihapitiya’s post on X (Formerly Twitter).

AI spending heavily dependent on venture capital

The argument centres on the claim that just 1 per cent of companies account for around 90 per cent of AI spending, with approximately 80 per cent of that spending attributed to unprofitable, venture-backed businesses.

According to the estimate presented in the discussion, this means roughly 70-75 cents of every dollar spent on AI ultimately comes from companies using venture capital funding.

“1% of companies represent 90% of AI spending. Of that 90%, 80% of this spend are from unprofitable VC backed companies. So, roughly, $0.70-75 of every dollar of AI spending right now comes from AI companies spending VC investment dollars. As a result, the revenue quality in AI is currently poor. This happened in previous cycles as well, like cloud when early users of AWS were mostly venture backed startups (sic),” Palihapitiya wrote on X.

The figures suggest that a significant share of current AI demand may depend on continued fundraising rather than established businesses paying for AI services from recurring operating revenues. However, these estimates should be treated as attributed claims, not independently verified measures of the entire AI market.

The distinction is important for investors and technology companies assessing the long-term prospects of AI infrastructure providers. Spending supported by venture funding can fuel rapid growth, but it may become vulnerable if fundraising slows or startups begin cutting costs.