In the midst of a general downturn in the venture capital industry, startups specialising in generative artificial intelligence technology are experiencing a surge in growth.
The AI Fever Has Investors Pouring Billions Into Startups
The AI fever has been building for several years, but it reached new heights in 2020 and 2021. The COVID-19 pandemic brought many challenges to businesses worldwide, but it also highlighted the importance of AI in areas such as healthcare and e-commerce. AI can be used to analyze vast amounts of data, which has become increasingly important in a world where businesses generate more data than ever before. As a result, investors have been eager to invest in companies that are using AI to innovate and solve complex problems.
Despite the overall slump in Silicon Valley's venture-capital ecosystem, there has been a surge of investment this year in companies like Essential that specialize in generative AI systems capable of creating human-like conversation, imagery, and computer code. Many of these companies are relatively new and untested.
According to analysts at research firm PitchBook, investment in generative AI companies is expected to far exceed last year's $4.5 billion. This increase can be attributed in part to Microsoft's $10 billion investment in January into OpenAI, the startup responsible for the immensely popular ChatGPT bot. By comparison, investment in generative AI companies totaled just $408 million in 2018 when OpenAI first released the language model that powers ChatGPT.
The market for generative AI is expected to expand from movie production to customer service to grocery delivery, with entrepreneurs and investors anticipating significant changes in business activities. According to PitchBook, the enterprise technology market for such AI applications is forecasted to increase to $98 billion by 2026 from $43 billion this year. However, investors are investing in AI startups despite the uncertainty of profitability, similar to the recently concluded bull run of broader startup investments. This is mainly because training AI services can be expensive, costing tens of millions of dollars or more per year in computational power. The surge of funding is also motivating many AI researchers to establish their own businesses, leading to increased competition, even among those without prior management or operational experience.
Overall, U.S. venture funding plunged 55% to $37 billion in the first quarter, according to PitchBook. Eleven Labs, a startup specialising in voice AI, recently secured funding from Andreessen Horowitz that valued the company at roughly $100 million. In March, Humane, a startup founded by two former Apple executives, raised $100 million from investors, including Mr. Altman, to develop wearable devices powered by AI, as reported by The Wall Street Journal.
Character.AI, which was established less than two years ago by two ex-Google employees, raised $150 million in a recent funding round that valued the company at $1 billion, according to a statement released by the company. Cohere, a Toronto-based generative AI startup, raised $250 million, which would value the company at $2 billion, according to The Financial Times earlier report.
“It is undeniably a major inflection point, and great products and companies are going to be built,” said Matt Turck, an investor specialising in AI at FirstMark, a New York-based venture-capital firm. But “as in prior hype cycles, a lot of this will not end well. The market cannot sustain, all of a sudden, a million different companies with half-baked ideas. It feels like the gold rush.”
However, despite these risks, investors remain bullish on AI. According to a recent report by PwC, the global AI market is expected to reach $15.7 trillion by 2030. This represents a massive opportunity for investors who can identify the most promising AI-driven businesses. As AI continues to advance and transform industries, it will be crucial for investors to balance the potential benefits with ethical considerations and take caution before jumping into the field.
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