The Growing Interest and Risks in Generative AI Investments
Investment Trends in Generative AI
The realm of generative artificial intelligence (Gen AI) continues to capture significant attention from investors worldwide, driven by rapid technological advancements and substantial capital inflows. Investment patterns reveal a strong and ongoing interest, with global venture capital in Gen AI surpassing $56 billion in 2024, marking a remarkable year-over-year increase.
Despite this enthusiastic investment climate, uncertainties and risks are inherent in the AI sector, prompting discussions around strategic investments and necessary protections for stakeholders. These developments bear significant implications for venture capitalists, private equity managers, and corporate board members.
Insights from Industry Experts
Walker Newell, a senior vice president and an expert in regulation and securities litigation at Woodruff Sawyer, provides insights into the evolving Gen AI investment landscape.
“Big tech companies have been pouring and continue to pour billions of capital expenditure dollars into Gen AI projects,” Newell noted. “Softbank’s plan to invest $40 billion in OpenAI at a $260 billion pre-money valuation is a testament to this trend, coming just two years after the public introduction of ChatGPT.”
Newell also addressed recent market fluctuations linked to competitive developments within AI. “In January 2025, the Gen AI investment thesis faced scrutiny when DeepSeek, a Chinese startup, seemed to have developed a genuine ChatGPT competitor at a fraction of the cost,” he said. “Nvidia’s stock price experienced a downturn, along with many other tech companies.”
He further explained the vulnerability of smaller AI ventures to market shifts, invoking Warren Buffett: “A rising AI tide lifts all AI boats. Conversely, when the AI tide goes out, you find out who is swimming AI naked.”
Investment Strategies and Risks
For private investment managers, avoiding Gen AI investments altogether is not practical. Newell describes the approach necessary in early-stage investing: “You are supposed to kiss a bunch of AI frogs before you meet your AI prince and get your AI happy ending,” he said. “If you don’t pick some AI losers along the way, you’re not doing it right.”
Newell pointed out the inevitable challenges, noting that even a middle-case scenario could result in many AI losers. He remarked that litigation often follows the collapse of once-promising firms. “When that happens, the board seat you took when your firm invested looks less like a spot at the buffet table and more like a place in the line of fire.”
Importance of Insurance in Risk Management
To manage these risks, Newell emphasized the importance of having robust insurance coverage. “With a well-constructed insurance program, you can breathe easy even if some of your portfolio companies face significant financial issues or bankruptcy,” he said.
Indemnification is always the initial line of defense. However, if the company is unwilling or unable to indemnify a director, D&O insurance can step in. In shareholder derivative and bankruptcy scenarios, Side A coverage is especially crucial to ensure that dedicated insurance is available to the directors.
Newell also discussed outside directorship liability (ODL) coverage, explaining that it sits above the portfolio company’s D&O insurance, which responds first. ODL coverage only applies if the portfolio company is either unable or unwilling to indemnify a director. “When those criteria are met, however, ODL coverage provides an additional layer of protection. This risk is most prevalent in the context of bankruptcy and shareholder derivative litigation,” he said.
He stressed the importance of policy effectiveness and advocacy, noting that regardless of how Gen AI develops, there will be both major winners and numerous losers in the sector. “Well-structured insurance coverage at both the portfolio company and investment manager level can help mitigate the legal risks associated with serving on the boards of companies that fail.”
“Finally, when you pay for this insurance year after year, you want the umbrella to open on rainy days. Your insurance advisors need to provide expert and robust claims advocacy to ensure your policy performs.”
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