Generative artificial intelligence (Gen AI) continues to attract significant attention from investors, driven by rapid technological advancements and substantial capital inflows.
Investment trends indicate a robust and sustained interest, as global venture capital in Gen AI surpassed $56 billion in 2024, marking a notable year-over-year growth.
Despite this enthusiastic investment climate, uncertainties and risks remain inherent in the AI sector, prompting discussions around investment strategies and the necessary protections for stakeholders. These developments have significant implications for venture capitalists, private equity managers, and corporate board members alike.
Walker Newell, senior vice president and regulation and securities litigation attorney at Woodruff Sawyer, shared insights into the evolving Gen AI investment environment.
“Big tech companies have been pouring and continue to pour billions of CapEx dollars into Gen AI projects," Newell said. "Softbank will invest $40 billion in OpenAI at a $260 billion pre-money valuation. This comes only about two years after ChatGPT was first made available to the public."
Newell also addressed recent market fluctuations linked to competitive developments in AI. "In January 2025, the Gen AI investment thesis was pressure-tested when DeepSeek, a Chinese startup, appeared to have developed a bona fide ChatGPT competitor at a small fraction of the cost," he said.
"Nvidia’s stock price swooned, along with many other tech companies,” Newell said. “As of this writing, the narrative around DeepSeek remains hotly contested, and Nvidia’s stock price has mostly recovered. Anyone who says that they know exactly how this story will play out is probably trying to sell you something."
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."
"As it goes valuation-wise for the OpenAI whale, so it goes for pre-profitability Gen AI startups clinging like remora to the big overall transformative growth narrative,” he said.
Avoiding Gen AI investments entirely is not practical for private investment managers. 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 (i.e., a ridiculous multiple on your initial investment). If you don’t pick some AI losers along the way, you’re not doing it right,” he said.
Still, Newell pointed to the inevitable challenges, noting that even a middle-case scenario could produce many AI losers. 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,” he said.
To manage these risks, Newell emphasized the importance of having solid insurance coverage. "With a well-constructed insurance program, you can breathe easy even if some of your portfolio companies experience significant financial issues or bankruptcy," he said.
"Indemnification is always the initial line of defense," Newell said. "But 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 important to ensure that dedicated insurance is available to the directors."
However, he cautioned that issues can crop up when the size of the insurance program doesn’t keep pace with exponential growth in revenue and funding.
Newell also addressed 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 a very nice additional layer of protection. This risk is most prevalent in the context of bankruptcy and shareholder derivative litigation,” he said.
Newell stressed the importance of policy effectiveness and advocacy, noting that regardless of how Gen AI develops, there will be both major winners and many 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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