After years of easy money, the AI industry faces a reckoning.
New report from the Stanford Human-Centered Artificial Intelligence Institute (HAI), which studies AI trends, found that globally investment in AI fell for the second year in a row in 2023.
Both private investment (i.e. investments in venture capital startups) and corporate investment (mergers and acquisitions) in the artificial intelligence industry were in decline in 2023 compared to the previous year, according to the report, citing company market intelligence data Quid.
AI-related mergers and acquisitions fell from $117,16 million in 2022 to $80,61 million in 2023, a 31,2% decrease; private investment fell from $103,4 million to $95,99 million. Taking into account minority stake deals and public offerings, total AI investment fell to $189.2 billion last year, a 20% decline compared to 2022.
However, some AI companies continue to attract substantial tranches, such as Amazon's recent multibillion-dollar investment in Anthropic and Microsoft's $650 million acquisition of Inflection AI. And more AI companies are receiving investment: 1.812 AI startups announced funding in 2023, up 40,6% from 2022, according to Stanford's HAI report.
So what is going on?
Gartner analyst John-David Lovelock says he sees investment in AI “expanding” as larger players (Anthropic, OpenAI, etc.) take over.
“The billion-dollar investment count has slowed and is almost over,” Lovelock said. “Large AI models require massive investments. “The market is now more influenced by technology companies that will use existing AI products, services and offerings to create new offerings.”
Umesh Padval, CEO of Thomvest Ventures, attributes the reduction in overall investment in AI to slower-than-expected growth. The initial wave of enthusiasm has given way to reality, he says: that AI is fraught with challenges (some technical, others marketing) that will take years to fully address and overcome.
“The slowdown in investment in AI reflects the recognition that we are still in the early phases of the evolution of AI and its practical implementation across industries,” Padval said. “While the long-term market potential remains immense, initial exuberance has been tempered by the complexities and challenges of scaling AI technologies into real-world applications… This suggests a more mature and demanding investment landscape.”
Other factors could be affecting this scenario.
Greylock partner Seth Rosenberg argues that there is simply less appetite to fund “groups of new players” in the AI space.
“We saw a lot of investment in foundation models during the first part of this cycle, which require a lot of capital,” he said. “The capital required for AI applications and agents is less than other parts of the mix, which may explain why absolute dollar funding has decreased.”
Aaron Fleishman, a partner at Tola Capital, says investors may be realizing that they have relied too much on “projected exponential growth” to justify the sky-high valuations of AI startups. To give an example, artificial intelligence company Stability AI, which was valued at more than $2022 billion at the end of 11, reportedly generated only $2023 million in revenue in 153 and spent $XNUMX million on operating expenses.
“The performance trajectories of companies like Stability AI could indicate challenges ahead,” Fleishman said. “There has been a more deliberate approach by investors when evaluating AI investments compared to a year ago. The rapid rise and fall of certain big-name AI startups over the past year has illustrated the need for investors to refine and sharpen their vision and understanding of the AI and defense value chain within the service suite.”
In fact, “deliberate” seems to be the name of the game now.
According to a PitchBook report, venture capitalists invested $25.870 billion globally in AI startups in the first quarter of 2024, up from $21.690 billion in the first quarter of 2023. But investments in the first quarter of 2024 covered only 1.545 deals compared to 1.909 in the first quarter of 2023. Meanwhile, it slowed from 195 in the first quarter of 2023 to 176 in the first quarter of 2024.
Despite general unease within AI investor circles, generative AI (AI that creates new content, such as text, images, music and videos) remains a focus.
Funding for generative AI startups reached $25.200 billion in 2023, according to Stanford's HAI report, nearly nine times the investment in 2022 and about 30 times the amount in 2019. Generative AI accounted for more than a quarter of all AI-related investments in 2023.
However, Samir Kumar, co-founder of Touring Capital, doesn't think the boom times will last. “We will soon evaluate whether generative AI delivers the promised efficiency goals to the market at scale and drives top-line growth through AI-embedded products and services,” Kumar said. "If these anticipated milestones are not met and we remain primarily in an experimental phase, revenue from 'experimental run rates' may not be converted into sustainable annual recurring revenue."
According to Kumar, several high-profile venture capitalists, including Meritch Capital - whose bets include Facebook and Salesforce -, TCV, General Atlantic and Blackstone have clearly maintained Generative AI so far. And generative AI's biggest customers, corporations, seem increasingly skeptical about 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 generative AI to generate substantial productivity benefits and are concerned about the potential for errors and data compromises. that arise from generative tools powered by AI.
But whether skepticism and the resulting financial downtrends are a bad thing depends on each person's individual point of view.
For his part, Padval sees the AI industry undergoing a “necessary” correction from a “bubble-like investment fervor.” And, in his opinion, there is light at the end of the tunnel.
“We are moving towards a more sustainable and normalized pace in 2024,” he said. “We anticipate this stable pace of investment to persist for the remainder of this year…While there may be periodic adjustments to the pace of investment, the overall trajectory of AI investment remains strong and poised for sustained growth.”
We will see.
