After years of easy money, the AI industry is facing liquidation.
Global investment in AI decreased for the second consecutive year in 2023, according to a new report from Stanford University's Human-Centered Artificial Intelligence Institute (HAI), which studies AI trends.
According to the report, which cited data from market intelligence firm Quid, both private investment (VC investments in startups) and corporate investment (mergers and acquisitions) in the AI industry will be on the decline compared to the previous year in 2023. It is said that there is.
AI-related M&A decreased by 31.2% from $117.16 million in 2022 to $80.61 million in 2023. Private investment decreased from $103.4 million to $95.99 million. Taking into account minority stock transactions and public offerings, total investment in AI decreased to $189.2 billion last year, a 20% decrease compared to 2022.
But some AI ventures are still attracting significant funding, like Anthropic's recent multibillion-dollar investment from Amazon and Microsoft's $650 million acquisition of Inflection AI. Additionally, more AI companies are receiving investment than ever before, with 1,812 AI startups announcing funding in 2023, a 40.6% increase from 2022, according to a Stanford HAI report. It is said to be increasing.
what happened?
Gartner analyst John-David Lovelock said he sees AI investment “growing” as the biggest companies, such as Anthropic and OpenAI, establish themselves.
“The number of billion-dollar investments has slowed and is almost over,” Lovelock told TechCrunch. “Large-scale AI models require huge investments. The market is now increasingly influenced by technology companies leveraging existing AI products, services, and products to build new products.”
Umesh Padwal, managing director at Thomvest Ventures, believes the overall decline in AI investment is due to slower-than-expected growth. The initial wave of enthusiasm has given way to reality, he says. AI is plagued by technical issues and market launch challenges that will take years to address and fully overcome.
“The slowdown in AI investment reflects the recognition that we are still far from the early stages of AI evolution and commercialization across industries,” Padval said. “While the long-term potential of the market remains immense, initial excitement has been tempered by the complexity and challenges of scaling AI technologies in real-world applications. This suggests a certain investment environment.
There may be other factors at play.
Seth Rosenberg, a partner at Greylock, argues that there is simply less appetite to fund “a large number of new players” in the AI space.
“Early in this cycle, we saw significant investment in foundational models that were very capital-intensive,” he said. “AI applications and agents require lower capital than other parts of the stack, which may be why funding in absolute dollars is decreasing.”
Aaron Fleischman, a partner at Torra Capital, said investors are realizing they are relying too much on the “rapid expected growth” of AI startups to justify their sky-high valuations. He says it might be possible. As an example, Stability AI, an AI company that was valued at more than $1 billion at the end of 2022, reported revenue of just $11 million in 2023 while spending $153 million on operating expenses. ing.
“The performance trends of companies like Stability AI may indicate challenges ahead,” Fleischman said. “Compared to a year ago, there is a more measured approach by investors in evaluating AI investments. It shows that we need to refine and sharpen our view and understanding of defensibility within the stack.”
Indeed, “deliberate” seems to be the name of the game now.
Venture capital invested $25.87 billion in AI startups globally in the first quarter of 2024, up from $21.69 billion in the first quarter of 2023, according to a PitchBook report compiled for TechCrunch. However, in the first quarter of 2024, there were only 1,545 investments, compared to 1,909 investments in the first quarter of 2023. Mergers and acquisitions, meanwhile, slowed from 195 in Q1 2023 to 176 in Q1 2024.
Despite the overall downturn in AI investor circles, generative AI (AI that creates new content such as text, images, music, and video) remains a bright spot.
Funding for generative AI startups will reach $25.2 billion in 2023, nearly nine times the amount invested in 2022 and nearly 30 times the amount invested in 2019, according to a Stanford HAI report. Generative AI also accounted for more than a quarter of his total AI-related investments in 2023.
But Touring Capital co-founder Sameer Kumar doesn't think the boom will last. “We will soon assess whether generative AI will deliver the promised efficiency gains at scale and drive top-line growth through AI-integrated products and services,” Kumar said. “If these anticipated milestones are not achieved and we remain primarily in the experimental phase, the revenue from our ‘experiment execution rate’ may not translate into sustainable annual recurring revenue.”
Kumar points out that several big-name venture capital firms, including Meritch Capital (whose investments include Facebook and Salesforce), TCV, General Atlantic, and Blackstone, have so far avoided generative AI. There is. And companies, the biggest customers of generative AI, appear increasingly skeptical about the technology's promise and whether it can deliver.
Two recent studies by Boston Consulting Group found that nearly half of respondents (all executives) do not expect generative AI to deliver significant productivity gains and are concerned about the potential for mistakes and failures. He said he was worried. Data breaches resulting from AI-powered generation tools.
But whether skepticism and the economic downward trend it may create is a bad thing depends on your perspective.
Padval believes the AI industry is undergoing a “necessary” correction in a “bubble-like investment frenzy.” And, according to his belief, there is light at the end of the tunnel.
“In 2024, we will move to a more sustainable and normalized pace,” he said. “We expect this steady investment rhythm to continue through 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 driven by sustained growth.” We are ready for it.”
we will see.