Investors are becoming wary of AI
After years of making easy money, the AI industry is facing difficulties.
A 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 consecutive year in 2023.
Both private investment in the AI industry – that is, investments from VCs into startups – and corporate investment – mergers and acquisitions – were on the decline in 2023 compared to a year earlier, according to 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. 31.2%; Private investment fell from $103.4 million to $95.99 million. Factoring in minority stake deals and public offerings, Total investment in AI fell to $189.2 billion last year, down 20% from 2022.
Yet some AI ventures continue to attract substantial tranches, such as Anthropic’s recent multibillion-dollar investment from Amazon and Microsoft’s $650 million acquisition of Inflection AI. And according to the Stanford HAI report, more AI companies are receiving investment than ever before, with 1,812 AI startups announcing funding in 2023, a 40.6% increase from 2022.
So what is going on?
Gartner analyst John-David Lovelock says he sees AI investment “spreading out” as the biggest players – Anthropic, OpenAI and so on – stake their ground.
“Billions of dollars of investment have slowed to a trickle and are almost gone,” Lovelock told TechCrunch. “Large AI models require massive investment. The market is now more influenced by technology companies that will use existing AI products, services and offerings to create new offerings.
Umesh Padwal, managing director, Thomvest Ventures, attributes the slower than expected growth to the declining overall investment in AI. The initial wave of excitement has given way to reality, he says: AI is beset by challenges — some technical, some go-to-market — that will take years to address and fully overcome.
“The slowdown in AI investment reflects the recognition that we are still in the early stages of AI development and its practical implementation across industries,” Padwal said. “While the long-term market potential remains immense, the initial excitement has been tempered by the complexities and challenges of scaling AI technologies into real-world applications… This suggests a more mature and sensible investment landscape.”
Other factors may also be at play.
Greylock partner Seth Rosenberg argues that there is less willingness to fund “a bunch of new players” in the AI field.
“We saw a lot of investment during the early part of this cycle in foundation models, which are very capital intensive,” he said. “The capital required for AI applications and agents is lower than for other parts of the stack, which is why funding on an absolute dollar basis has been lower.”
Aaron Fleishman, partner at Tola Capital, says investors are realizing that they have become too reliant on “projected exponential growth” to justify AI startups’ skyrocketing valuations. To give an example, AI company Stability AI, which was valued at more than $1 billion at the end of 2022, reportedly generated only $11 million in revenue in 2023, while spending $153 million on operating expenses.
“The performance trajectories of companies like Stability AI may indicate the challenges ahead,” Fleishman said. “A more thoughtful approach has been taken by investors in evaluating AI investments compared to a year ago. The rapid rise and fall of some of the biggest name startups in AI over the past year has highlighted the need for investors to refine and sharpen their perspective and understanding of the AI value chain and defensible within the stack.
In fact the name of the game now seems to be “intentional.”
According to 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. But Q1 2024 investments were spread across only 1,545 deals compared to 1,909 in Q1 2023. Mergers and acquisitions, meanwhile, slowed from 195 in the first quarter of 2023 to 176 in the first quarter of 2024.
Despite the general malaise in AI investor circles, generic AI – AI that creates new content like text, images, music and video – remains a bright spot.
FAccording to the Stanford HAI report, funding for generic AI startups is set to reach $25.2 billion in 2023, nearly nine times the investment in 2022 and nearly 30 times more than in 2019. And Generic AI was expected to account for more than a quarter of all AI-related investments in 2023.
However, Sameer Kumar, co-founder of Touring Capital, does not think the bullish phase will last long. “We will soon evaluate whether generative AI delivers the promised efficiency gains at scale and drives top-line growth through AI-integrated products and services,” Kumar said. “If these anticipated milestones are not met and we remain primarily in the experimental phase, revenues from the ‘experimental run rate’ may not translate into sustainable annual recurring revenues.”
To Kumar’s point, a number of high-profile VCs, including Merrick Capital – whose bets include Facebook and Salesforce – TCV, General Atlantic and Blackstone, have so far steered clear of generative AI. And generic AI’s biggest customers, corporations, are skeptical about the technology’s promises, and whether it can deliver on them.
In a pair of recent surveys from Boston Consulting Group, nearly half of the respondents—all C-suite executives—said they do not expect to see substantial productivity gains from generative AI and are concerned about the potential for mistakes and errors in generative AI. Data compromise resulting from powered tools.
But whether skepticism, and the resulting financial fallout, is a bad thing depends on your perspective.
For Padval’s part, he sees the AI industry undergoing a “necessary” correction to “bubble-like investment enthusiasm.” And, in their belief, there is light at the end of the tunnel.
“We are moving towards a more sustainable and normalized pace in 2024,” he said. “We expect this steady investment rhythm to continue through the remainder of this year… While there may be adjustments in the pace of investment from time to time, the overall trajectory for AI investment is strong and poised for continued growth.”
we will see.