Venture capitalists are questioning the neolab math

Menlo Ventures' Matt Murphy speaking to Ben Bergman at Tech Insider: Growth Mode.

JY Studio A version of this story originally appeared in Business Insider's weekly VC Insider newsletter.

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Up until recently, it was a great time to be the founder of a neolab, the lavishly funded, research-first AI startups founded by top talent who defected from the likes of OpenAI or Google DeepMind.

We reported last month that Jeff Dean, Google's former chief scientist, is seeking a valuation as high as $50 billion for his new AI science startup.

OpenAI cofounder Ilya Sutskever's Safe Superintelligence is worth $32 billion.

Another OpenAI alum, Mira Murati, is raising a round for Thinking Machines Lab at a valuation of around $40 billion.

But lately, in conversations with multiple VCs around Silicon Valley, there is a growing divide about whether neolabs can make the economics work with their multibillion-dollar price tags and formidable competition from frontier labs.

One VC at a top firm, who asked that I not use his name, told me neolabs are the most hotly debated type of investment right now.

"Some would say you shouldn't invest in any, and others would say this is basically all you should be investing in because software's dead, and you either have to own models or hardware, and even if you enter at a billion, the company could be worth a trillion," he said.

Business Insider; Randy Yeip When I recently asked Menlo Ventures partner Matt Murphy at Business Insider's Growth Mode conference which sector he thought was most overhyped, he immediately cited neolabs, which was noteworthy, given that Menlo invested in some of them .

Murphy pointed to an example from his time as an early board advisor at Google, which he said did so well because it "was like a match thrown into a bonfire." "The opposite thing you want to do is start a match with a bonfire," Murphy told me.

"That's the risk of what's going on now with companies raising such large rounds." Another Menlo partner, Deedy Das, posted last month about the "difficult game" of making neolab math work.