After years of easy money, the AI industry is facing a reckoning.
A brand new report from Stanford’s Institute for Human-Centered Artificial Intelligence (HAI), which studies AI trends, found that global investment in AI fell for the second 12 months in a row in 2023.
Each private investment — that’s, investments in startups from VCs — and company investment — mergers and acquisitions — within the AI industry were on the downswing in 2023 versus the 12 months prior, in line with the report, which cites data from market intelligence firm Quid.
AI-related mergers and acquisitions fell from $117.16 million in 2022 to $80.61 million in 2023, down 31.2%; private investment dipped from $103.4 million to $95.99 million. Factoring in minority stake deals and public offerings, total investment in AI dropped to $189.2 billion last 12 months, a 20% decline in comparison with 2022.
Yet some AI ventures proceed to draw substantial tranches, like Anthropic’s recent multibillion-dollar investment from Amazon and Microsoft’s $650 million acquisition of Inflection AI. And more AI corporations are receiving investments than ever before, with 1,812 AI startups announcing funding in 2023, up 40.6% versus 2022, in line with the Stanford HAI report.
So what’s happening?
Gartner analyst John-David Lovelock says that he sees AI investing “spreading out” as the most important players — Anthropic, OpenAI and so forth — stake out their ground.
“The count of billion-dollar investments has slowed and is all but over,” Lovelock told TechCrunch. “Large AI models require massive investments. The market is now more influenced by the tech corporations that’ll utilize existing AI products, services and offerings to construct latest offerings.”
Umesh Padval, managing director at Thomvest Ventures, attributes the shrinking overall investment in AI to slower-than-expected growth. The initial wave of enthusiasm has given technique to the truth, he says: that AI is beset with challenges — some technical, some go-to-market — that’ll take years to deal with and fully overcome.
“The deceleration in AI investing reflects the popularity that we’re still navigating the early phases of the AI evolution and its practical implementation across industries,” Padval said. “While the long-term market potential stays immense, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies in real-world applications … This means a more mature and discerning investment landscape.”
Other aspects could possibly be afoot.
Greylock partner Seth Rosenberg contends that there’s simply less appetite to fund “a bunch of recent players” within the AI space.
“We saw a whole lot of investment in foundation models throughout the early a part of this cycle, that are very capital intensive,” he said. “Capital required for AI applications and agents is lower than other parts of the stack, which could also be why funding on an absolute dollar basis is down.”
Aaron Fleishman, a partner at Tola Capital, says that investors is perhaps coming to the conclusion that they’ve been too reliant on “projected exponential growth” to justify AI startups’ sky-high valuations. To offer one example, AI company Stability AI, which was valued at over $1 billion in late 2022, reportedly brought in only $11 million in revenue in 2023 while spending $153 million on operating expenses.
“The performance trajectories of corporations like Stability AI might hint at challenges looming ahead,” Fleishman said. “There’s been a more deliberate approach by investors in evaluating AI investments in comparison with a 12 months ago. The rapid rise and fall of certain marquee name startups in AI over the past 12 months has illustrated the necessity for investors to refine and sharpen their view and understanding of the AI value chain and defensibility throughout the stack.”
“Deliberate” appears to be the secret now, indeed.
In line with a PitchBook report compiled for TechCrunch, VCs invested $25.87 billion globally in AI startups in Q1 2024, up from $21.69 billion in Q1 2023. However the Q1 2024 investments spanned across only one,545 deals in comparison with 1,909 in Q1 2023. Mergers and acquisitions, meanwhile, slowed from 195 in Q1 2023 to 176 in Q1 2024.
Despite the final malaise inside AI investor circles, generative AI — AI that creates latest content, akin to text, images, music and videos — stays a brilliant spot.
Funding for generative AI startups reached $25.2 billion in 2023, per the Stanford HAI report, nearly ninefold the investment in 2022 and about 30 times the quantity from 2019. And generative AI accounted for over 1 / 4 of all AI-related investments in 2023.
Samir Kumar, co-founder of Touring Capital, doesn’t think that the boom times will last, nevertheless. “We’ll soon be evaluating whether generative AI delivers the promised efficiency gains at scale and drives top-line growth through AI-integrated services and products,” Kumar said. “If these anticipated milestones aren’t met and we remain primarily in an experimental phase, revenues from ‘experimental run rates’ won’t transition into sustainable annual recurring revenue.”
To Kumar’s point, several high-profile VCs, including Meritech Capital — whose bets include Facebook and Salesforce — TCV, General Atlantic and Blackstone, have steered clear of generative AI to this point. And generative AI’s largest customers, corporations, seem increasingly skeptical of the tech’s guarantees, and whether it may well deliver on them.
In a pair of recent surveys from Boston Consulting Group, about half of the respondents — all C-suite executives — said that they don’t expect generative AI to bring about substantial productivity gains and that they’re frightened in regards to the potential for mistakes and data compromises arising from generative AI-powered tools.
But whether skepticism and the financial downtrends that may stem from it are a foul thing relies on your viewpoint.
For Padval’s part, he sees the AI industry undergoing a “mandatory” correction to “bubble-like investment fervor.” And, in his belief, there’s light at the tip of the tunnel.
“We’re moving to a more sustainable and normalized pace in 2024,” he said. “We anticipate this stable investment rhythm to persist throughout the rest of this 12 months … While there could also be periodic adjustments in investment pace, the general trajectory for AI investment stays robust and poised for sustained growth.”
We will see.
