For venture-backed startups, the penalty for prudence is irrelevance. When you are dealing with markets that move as fast as AI, with investment capital that starts with a “Billi”, the worst thing you can be is slow.Despite that, there has been a slew of negative reports detailing how AI wrapper startups like Cursor, Lovable, and Replit are running on thin margins (and sometimes negative gross margins). Or the takes dunking on how OpenAI could potentially lose $14 billion next year.At the risk of this sounding off the absolute top of the bubble: It is entirely rational and correct to run negative gross margins as a tech startup in markets as dynamic as the current one. While these companies could easily start harvesting profits if they wanted to, doing so would be distinctly dumb. Profits are a sign that management can’t think of anything productive to do with their cash, other than making a tax donation to the federal government.AI is perhaps the most exciting platform shift in computing history—if a founder can’t find a way to deploy excess cash flow now, when on earth can they?Historically speaking, software companies justified investing lots of money upfront in service to long-term customer relations. Invest now, keep your net dollar retention (NDR) above 120%, and you could profit for a decade to come. The underlying financial logic was built on spending once, harvesting forever. Crucially, software companies couldn’t assume a dramatic reduction in cost. Bezos and the AWS boys were never going to send you an email saying they had magically reduced your expenses by 50%.Generative AI is different. Every three to six months, foundation models companies like OpenAI will decrease your costs, increase your speed, and give you new, magical capabilities. Take, for example, just what happened with the GPT4 series of models. In just five months, you saw a ninefold decrease in your costs!This dual quality—of decreased cost plus increased capability—fundamentally alters th