After years of easy money, the AI industry is facing a reckoning.
A brand new report from the Stanford Institute for Human-Centered Artificial Intelligence (HAI), which studies AI trends, concludes that that is global Investment in AI fell for the second consecutive yr in 2023.
Both private investment – that’s, investment in VC startups – and company investment – mergers and acquisitions – within the AI industry were down in 2023 in comparison with the previous yr, the report said, citing Data from market research company Quid.
AI-related mergers and acquisitions fell from $117.16 billion in 2022 to $80.61 billion in 2023 31.2%; Private investment fell from $103.4 billion to $95.99 billion. Consideration of minority investment transactions and public offers, Total investment in AI fell to $189.2 billion last yr, a 20% decline in comparison with 2022.
Still, some AI corporations proceed to draw significant shares, equivalent to Amazon's recent multi-billion dollar investment by Anthropic and Microsoft's $650 million acquisition of Inflection AI's top talent (if not the corporate itself). And more AI corporations are receiving investment than ever before: According to the Stanford HAI report, 1,812 AI startups will announce funding in 2023, a 40.6% increase from 2022.
So what's occurring?
John-David Lovelock, an analyst at Gartner, says he sees an “expansion” of AI investments as the largest players – Anthropic, OpenAI, etc. – assert their place.
“The variety of billion-dollar investments has slowed down and is just about over,” Lovelock told TechCrunch. “Large AI models require massive investments. The market is now more influenced by technology corporations leveraging existing AI products, services and offerings to develop latest offerings.”
Umesh Padval, managing director of Thomvest Ventures, attributes the declining overall investment in AI to slower-than-expected growth. The initial wave of pleasure has given method to reality, he says: that AI faces challenges—some technical, others market-market issues—that can take years to deal with and fully overcome.
“The slowdown in AI investment reflects the popularity that we’re still within the early stages of AI development and its practical implementation across industries,” Padval said. “Although the long-term market potential stays immense, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies into real-world applications…This suggests a more mature and complex investment landscape.”
Other aspects could play a job.
Greylock partner Seth Rosenberg claims that there’s simply less interest in funding “a lot of latest players” within the AI space.
“We have invested so much Foundation models in the beginning of this cycle, that are very capital intensive,” he said. “The capital required for AI applications and agents is lower than for other parts of the stack, so funding could also be lower on an absolute dollar basis.”
Aaron Fleishman, partner at Tola Capital, says investors may come to the conclusion that they’ve relied too heavily on “predicted exponential growth” to justify the sky-high valuations of AI startups. To give an example, AI company Stability AI, which was valued at over $1 billion at the tip of 2022, reportedly generated just $11 million in revenue in 2023 and spent $153 million on operating costs .
“The performance trends of corporations like Stability AI could indicate challenges ahead,” Fleishman said. “Compared to last yr, investors have taken a more deliberate approach to evaluating AI investments. The rapid rise and fall of some notable AI startups over the past yr has shown that investors must refine and sharpen their view and understanding of the AI value chain and the defensibility throughout the stack.”
“Intentionally” actually appears to be the motto now.
According to a PitchBook report prepared for TechCrunch, VCs invested $25.87 billion in AI startups globally in the primary quarter of 2024, up from $21.69 billion in the primary quarter of 2023. However, the investments in the primary quarter of 2024 only prolonged to 1,545 deals in comparison with 1,909 in the primary quarter of 2023. Mergers and acquisitions, meanwhile, slowed from 195 in the primary quarter of 2023 to 176 in the primary quarter of 2024.
Despite the final dissatisfaction in AI investing circles, generative AI – AI that creates latest content equivalent to text, images, music and videos – stays a vivid spot.
FAccording to the Stanford HAI report, funding for generative AI startups reached $25.2 billion in 2023, almost nine times the investment in 2022 and about thirty times the quantity in comparison with 2019. And Generative AI accounted for over 1 / 4 of all AI-related investments in 2023.
However, Samir Kumar, co-founder of Touring Capital, doesn’t consider the boom times will last. “We will soon evaluate whether generative AI delivers the promised efficiencies at scale and drives revenue growth through AI-integrated services and products,” Kumar said. “If these expected milestones should not met and we remain primarily in an experimental phase, revenue from ‘experimental run rates’ may not convert into sustainable annual recurring revenue.”
According to Kumar, several high-profile VCs have done so, including Meritech Capital – whose bets include Facebook and Salesforce – TCV, General Atlantic and Blackstone made a transparent bow of generative AI thus far. And generative AI's biggest customers, corporations, seem increasingly skeptical in regards to the technology's guarantees and whether it might probably deliver on them.
In two recent surveys by Boston Consulting Group, about half of respondents – all C-suite executives – said they don’t expect generative AI to steer to significant productivity gains and that they’re concerned in regards to the potential for data compromises, created by generative AI-supported tools.
But whether skepticism and the resulting financial downturns are a foul thing will depend on your standpoint.
Padval, for his part, sees a “mandatory” correction within the AI industry towards a “bubble-like appetite for investment”. And he believes there’s light at the tip of the tunnel.
“We are moving to a more sustainable and normalized pace in 2024,” he said. “We expect this stable investment rhythm to proceed for the remaining of this yr… Although there may occasionally be adjustments within the pace of investment, the general development of AI investments stays robust and geared towards sustainable growth.”
We will see.
