Potential Pullback Threatens AI Growth

Jack Selby, managing director of Peter Thiel’s family office, Thiel Capital, highlighted that a potential pullback by these influential funds could withdraw hundreds of billions of dollars from the booming AI market. Such a scenario, he cautions, poses a direct threat to critical data center projects worldwide.

Middle Eastern investors, including sovereign wealth funds and various government entities, are estimated to contribute approximately a quarter of all global investments committed to AI over the next five years. Selby emphasized that if regional geopolitical tensions, such as the ongoing situation involving Iran, persist and lead countries like the United Arab Emirates and Saudi Arabia to redirect their investments towards domestic rebuilding efforts, the resulting capital loss could have widespread repercussions across data centers and both public and private technology companies.

“Markets have significantly underestimated the crucial role the Middle East plays in capital expenditure for AI and its foundational infrastructure,” Selby stated in an interview. He added, “Should the Middle East begin to postpone or cancel some of these vital projects, the market impact could be far more substantial than currently anticipated.”

Growing Dependence and Funding Risks

Selby’s warning carries significant implications for high-net-worth investors, family offices, and funds heavily invested in the AI sector. Recent reports of missed revenue targets at OpenAI have already unsettled tech and chip stocks, and Selby identifies the Middle East as another critical funding risk, given the increasing reliance of AI companies on capital from the region.

Major players like Oracle, Nvidia, and Cisco are actively involved in OpenAI’s campus in the UAE, aiming to develop 5 gigawatts of capacity. Microsoft has also announced plans to invest $15 billion in the UAE by 2029. The sovereign wealth funds of the UAE and Saudi Arabia have emerged as pivotal investors in private AI companies, with OpenAI reportedly seeking $50 billion from these large regional funds earlier this year.

Selby estimates that half of the Middle East’s AI funding is specifically allocated to data centers located within the region, while the other half supports projects and data centers globally. He noted that some Middle Eastern funds and companies have already begun canceling various shipping and business contracts by invoking force majeure clauses, raising concerns that data center projects could be next.

“The markets do not seem to grasp the reality and volatility of this situation,” he asserted. “While I hope for a swift return to normalcy, it appears markets are underpricing both the volatility and the inherent risks.”

Broader AI Bubble Concerns

Beyond regional geopolitical risks, Selby also cautioned against a broader threat of overinvestment and speculation within the AI sector. Drawing parallels to the dot-com bubble, he observed that investors and founders are indiscriminately inflating the valuations of AI and infrastructure companies. The current AI boom is consuming significantly more capital, with top hyperscalers projected to spend over $700 billion this year alone. Consequently, Selby predicts that any potential wealth destruction from an AI downturn could far exceed the losses experienced during the dot-com bust.

“AI is undeniably a revolutionary technology,” he clarified, “but it also has the potential to become an exceptional bubble. There will be significant winners, but also substantial losers, with the scale of losses potentially orders of magnitude greater than anything previously witnessed. An AI bubble burst could add one, two, or even three more zeros to the losses seen in the dot-com era, amounting to tens, if not hundreds, of billions of dollars.”

He cited Google’s emergence during the dot-com era as an example, where it disrupted established search functions like Ask Jeeves and AltaVista. Selby believes similar disruptions could occur among today’s leading AI companies.

Strategic Investment Approach

In light of these market dynamics, Selby’s personal AI investment strategy focuses on avoiding crowded sectors. With a second fund launching at Copper Sky, his Arizona-based VC fund, he aims to target tech firms outside the traditional hubs of California, New York, and Massachusetts. He argues that these three states, particularly the Stanford and MIT clusters, attract the majority of capital and attention, suggesting that better value opportunities exist elsewhere.

“Over 90% of all venture capital investment went to California, New York, and Massachusetts, an all-time high,” he explained. “The advantage is that by looking beyond these three states to the other 47, investment opportunities are considerably less expensive, and that is our focus.”

While declining to elaborate on Thiel’s family office specifics, Selby noted that Peter Thiel prioritizes investing in exceptional founders rather than specific industries. Thiel Capital, recognized among the most active family office investors, has a diverse portfolio spanning German drone manufacturing, gene therapy, AI hiring, and space research.

Family Office Direct Investment Pitfalls

As both a family office director and head of a VC fund that raises capital from family offices, Selby identified direct investments as a significant mistake for many family offices today. A recent Citibank survey revealed that seven out of ten family offices have engaged in direct investments in private companies, bypassing traditional funds.

Selby acknowledged the frustration driving this trend, citing the often dismal performance and lack of distributions from private equity and venture capital funds. He estimates that two-thirds of venture capital firms are “zombie VCs,” failing to raise or return money and ideally should cease operations. “Family offices are understandably frustrated with VCs who haven’t returned their capital, so why shouldn’t they try it themselves?” Selby remarked. “They couldn’t perform worse than many VCs in terms of making investments without delivering returns.”

However, he cautioned that typical family offices often lack adequate training in assessing, valuing, and restructuring private companies. He suggested that many ultra-wealthy investors are motivated more by status and peer pressure than by disciplined returns. “At their fancy cocktail parties in Manhattan, these individuals need interesting topics to discuss,” he said. “When all their friends are talking about direct investments, they feel compelled to participate. A shipping magnate in Manhattan, for instance, might know nothing about rocketry, yet invests in SpaceX simply for the sake of having a compelling story at a high-society event.”