Achi news desk-
After years of easy money, the AI industry is facing a reckoning.
A new report from Stanford’s Human-Centered Artificial Intelligence (HAI) Institute, which studies AI trends, found that global investment in AI fell for the second consecutive year in 2023.
Private investment – that is, investments in startups from VCs – 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 billion in 2022 to $80.61 billion in 2023, down 31.2%; private investment fell from $103.4 billion to $95.99 billion. Factors in minority stake deals and public offerings, Total investment in AI fell to $189.2 billion last year, a 20% decrease compared to 2022.
Yet some AI ventures continue to attract significant stakes, such as Amazon’s recent multibillion-dollar investment in Anthropic and Microsoft’s $650 million acquisition of top Inflection AI talent (if not the company itself). And more AI companies are receiving investments than ever before, with 1,812 AI startups announcing funding in 2023, up 40.6% versus 2022, according to the Stanford HAI report.
So what’s going on?
Gartner analyst John-David Lovelock says he sees AI investing “spreading out” as the biggest players – Anthropic, OpenAI and so on – occupy their ground.
“The count of billion dollar investments has slowed down and is almost over,” Lovelock told TechCrunch. “Big AI models require huge investments. The market is now more influenced by the technology companies who will use existing AI products, services and offerings to build new offerings.”
Umesh Padval, managing director of Thomvest Ventures, attributes the shrinking overall investment in AI to slower-than-expected growth. The initial wave of enthusiasm has given way to reality, he says: that AI faces challenges — some technical, some going to market — that will take years to tackle and overcome in full.
“The slowdown in AI investment reflects the recognition that we are still navigating the early stages of the evolution of AI and its practical implementation across industries,” Padval said. “While the market’s long-term potential remains immense, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies in real-world applications … This suggests a more mature and savvy investment landscape.”
Other factors could be at play.
Greylock partner Seth Rosenberg argues that there is less appetite to fund “a bunch of new players” in the AI space.
“We saw a lot of investment in base models during the first part of this cycle, which is very capital intensive,” he said. “The capital required for AI applications and agents is lower than other parts of the stack, which is why funding on an absolute dollar basis is potentially down.”
Aaron Fleishman, partner at Tola Capital, says investors may be realizing they’ve been too reliant on “anticipated exponential growth” to justify AI startups’ sky-high valuations. To give one example, AI company Stability AI, which was valued at over $1 billion at the end of 2022, is said to have brought in just $11 million in revenue in 2023 while spending $153 million on operating costs.
“The performance trajectories of companies like Stability AI may indicate challenges ahead,” Fleishman said. “Investors have taken a more deliberate approach when evaluating AI investments compared to a year ago. The rapid rise and fall of new marquee names in AI over the past year has shown that investors need to refine and sharpen their view and understanding of the AI value chain and the potential to protect them in the pile.”
“Intentional” seems to be the name of the game now, indeed.
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 only 1,545 deals in comparison with 1,909 in acquisitions Q1, Uno and Quarter 1,9023. meanwhile, 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.
FUnpaid for productive AI startups reached $25.2 billion in 2023, according to the Stanford HAI report, almost nine times the investment in 2022 and about 30 times the amount from 2019. And Productive AI accounted for over a quarter of all AI-related investments in 2023.
However, Samir Kumar, co-founder of Touring Capital, does not believe the boom times will last. “We will soon evaluate whether productive AI delivers the promised efficiency gains at scale and drives top-line growth through AI-integrated products and services,” Kumar said. “If these expected milestones are not achieved and we remain primarily in an experimental phase, revenue from ‘experimental run rates’ may not translate 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 so far stayed clear of productive AI. And AI’s most productive customers, corporations, seem increasingly skeptical of the technology’s promises, and whether it can deliver on them.
In a pair of recent Boston Consulting Group surveys, about half of respondents—all C-suite executives—said they don’t expect productive AI to deliver significant productivity gains and are concerned about the potential for mistakes and data compromises that derived from productive tools powered by AI.
But whether doubt and the financial decline that can result from it is a bad thing depends on your perspective.
As for Padval, he sees the AI industry undergoing a “necessary” correction to a “bubble-like investment firm.” And, in his opinion, there is light at the end of the tunnel.
“We are moving to a more sustainable and normal pace in 2024,” he said. “We anticipate this stable investment rhythm to continue throughout the rest of this year… While there may be periodic changes in the pace of investment, the overall trajectory for AI investment remains robust and poised on for continued growth.”
We will see.
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