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After years of easy money, the AI industry is facing a reckoning.
A new report from the Stanford Human-Centered Artificial Intelligence (HAI) Institute, which studies AI trends, finds that the world Investment in artificial intelligence fell for the second year in a row in 2023.
Both private investment — that is, investments in startups from venture capital firms — and corporate investment — mergers and acquisitions — in the AI industry were on the decline in 2023 compared to the previous year, according to the report, which cites Data from market intelligence company Quid.
AI-related mergers and acquisitions fell from $117.16 million in 2022 to $80.61 million in 2023, down 31.2%; Private investment fell from $103.4 million to $95.99 million. Factoring in minority stake deals and public offerings, Total investment in artificial intelligence fell to $189.2 billion last year, down 20% compared to 2022.
However, some AI projects continue to attract large segments, such as Anthropic’s recent multibillion-dollar investment from Amazon, and Microsoft’s $650 million acquisition of Inflection AI. More AI companies are receiving investment than ever before, with 1,812 AI startups announcing funding in 2023, a 40.6% increase compared to 2022, according to the Stanford HAI report.
what’s going?
John David Lovelock, an analyst at Gartner, says he sees investment in AI “spreading out” as the biggest players — Anthropian, OpenAI, etc. — stake their turf.
“The number of billion-dollar investments has slowed down and is almost gone,” Lovelock told TechCrunch. “Large AI models require huge investments. The market is now more influenced by technology companies that will use existing AI products, services and offerings to build new ones.
Umesh Padhaval, managing director at Thomvest Ventures, attributes the shrinkage in overall investment in AI to slower-than-expected growth. He says the initial wave of enthusiasm has given way to reality, which is that AI has challenges — some technical, some market-oriented — that will take years to fully address and overcome.
“The slowdown in investment in AI reflects the recognition that we are still navigating the early stages of AI development and its practical implementation across industries,” Paval said. “Although the long-term market potential remains enormous, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies in real-world applications… This points to a more mature and differentiated investment landscape.”
Other factors could be at play.
Greylock partner Seth Rosenberg asserts that there is simply less appetite to fund “a bunch of new players” in the AI space.
“We’ve seen a lot of investment in Foundation models During the first part of this cycle, it is extremely capital intensive. “The capital required for AI applications and agents is lower than other parts of the stack, which may be why funding is lower on an absolute dollar basis.”
Investors may have begun to realize that they were relying too heavily on “expected exponential growth” to justify high valuations for AI startups, says Aaron Fleishman, a partner at Tula Capital. For example, AI company Stability AI, which was valued at more than $1 billion in late 2022, reportedly generated just $11 million in revenue in 2023 while spending $153 million on operating expenses.
“The performance trajectories of companies like Stability AI may indicate challenges on the horizon,” Fleishman said. “There has been a more deliberate approach by investors in evaluating AI investments compared to last year. The rapid rise and fall of some big-name AI startups over the past year has demonstrated the need for investors to improve and refine their view and understanding of the AI value chain and its defensibility.” Within the group.
It seems that “intentional” is really the name of the game now.
According to a PitchBook report prepared for TechCrunch, venture capital firms invested $25.87 billion globally in AI startups in the first quarter of 2024, up from $21.69 billion in the first quarter of 2023. But the first quarter investments of 2024 spanned just 1,545 deals compared to 1,909 deals in Q1 2023. Meanwhile, it slowed from 195 in Q1 2023 to 176 in Q1 2024.
Despite the general malaise within AI investor circles, generative AI — AI that creates new content, such as text, images, music, and videos — remains a bright spot.
FInvestment in AI startups reached $25.2 billion in 2023, according to the Stanford HAI report, nearly nine times the investment in 2022 and about 30 times the amount in 2019. Generative AI will represent more than a quarter of all AI-related investments in 2023.
However, Sameer Kumar, co-founder of Touring Capital, does not believe the boom times will last. “We will soon evaluate whether generative AI delivers the widely promised efficiency gains and drives higher growth through integrated AI products and services,” Kumar said. “If these expected milestones are not achieved and we remain primarily in beta, revenues may not convert from ‘trial run rates’ to sustainable annual recurring revenues.”
In Kumar’s view, several high-profile venture capital firms including Meritsch Capital – whose bets include Facebook, Salesforce – TCV, General Atlantic, and Blackstone have… Clear guidance Generative AI so far. The largest customers of generative AI, companies, appear to be increasingly skeptical about the technology’s promises and whether it can deliver.
In two recent BCG surveys, about half of respondents — all executives — said they did not expect productive AI to deliver significant productivity gains and were concerned about the potential for errors and failure. Data compromises arising from AI-powered generative tools.
But whether uncertainties, and the downward financial trends that can result from them, are a bad thing depends on your perspective.
For Padvale’s part, he sees the AI industry as undergoing a “necessary” correction to “bubble-like investment enthusiasm.” In his belief, there is a light at the end of the tunnel.
“We are moving to a more sustainable and normalized pace in 2024,” he said. “We expect this stable investment rhythm to continue throughout the remainder of this year… While there may be periodic adjustments in the pace of investment, the overall trajectory of AI investment remains strong and poised for sustained growth.”
we will see.
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