After years of easy money, the AI industry is facing a reckoning.
A new report from the Stanford Institute for Human-Centered Artificial Intelligence (HAI), which studies AI trends, found that worldwide Investments in artificial intelligence declined for the second year in a row in 2023.
Both private investment — meaning investment in startups by VCs — and corporate investment — mergers and acquisitions — in the AI industry were on a downward trend in 2023 compared to the previous year, according to the report, which states data from market intelligence company Quid.
AI-related mergers and acquisitions decreased 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. Inclusion in minority deals and public offers, Total investment in artificial intelligence fell to $189.2 billion last year, a 20% decrease compared to 2022.
However, 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 Inflection AI. And more AI companies are receiving investment than ever before, with 1,812 AI startups announcing funding in 2023, up 40.6% from 2022, according to the Stanford HAI report.
So what’s going on?
Gartner analyst John-David Lovelock says he sees AI “spreading” as the bigger players — Anthropic, OpenAI and so on.
“The number of billion-dollar investments has slowed and ended,” Lovelock told TechCrunch. “Big AI models require huge investments. The market is now more influenced by technology companies that will use existing products, services and AI offerings to create new offerings.”
Umesh Padval, managing director of Thomvest Ventures, attributes the decline in overall AI investment to slower-than-expected growth. The initial wave of excitement has given way to reality, he says: that AI is beset by challenges — some technical, some market-driven — that will take years to fully address and overcome.
“The slowdown in AI investment reflects the recognition that we are still navigating the early stages of AI evolution and its practical application across industries,” said Padval. “While the long-term market potential remains enormous, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies to real-world applications… This suggests a more mature and challenging investment landscape.”
Other factors could be involved.
Greylock partner Seth Rosenberg argues that there’s simply less appetite to fund “a bunch of new players” in the AI space.
“We saw a lot of investment in foundation models during the first part of this cycle, which are very capital intensive,” he said. “The capital required for AI applications and agents is lower than other parts of the stack, so funding on an absolute dollar basis may be decreasing.”
Aaron Fleishman, a partner at Tola Capital, says investors may be realizing they’re too reliant on “anticipated exponential growth” to justify the lofty valuations of AI startups. To give an example, AI company Stability AI, which was valued at over $1 billion at the end of 2022, reportedly generated just $11 million in revenue in 2023 while spending $153 million in operating expenses.
“The performance trajectories of companies like Stability AI may indicate challenges ahead,” Fleishman said. “There has been a more deliberate approach by investors in evaluating AI investments compared to a year ago. The rapid rise and fall of a number of AI startups over the past year has demonstrated the need for investors to refine and sharpen their view and understanding of the AI value chain and advocacy within the stack.”
“Deliberate” seems to be the name of the game now, indeed.
According to a PitchBook report written for TechCrunch, VCs globally invested $25.87 billion in AI startups in Q1 2024, up from $21.69 billion in Q1 2023. However, Q1 investments of 2024 covered only 1,545 deals and 29 in 1,90 quarter Meanwhile, it slowed from 195 in the first quarter of 2023 to 176 in the first quarter of 2024.
Despite the general malaise in AI investor circles, genetic AI — AI that creates new content, such as text, images, music and video — remains a bright spot.
eatAI startups will reach $25.2 billion in 2023, according to the Stanford HAI report, nearly nine times the investment in 2022 and about 30 times the amount from 2019. And Genetic AI accounted for over a quarter of all AI-related investments in 2023.
But Samir Kumar, co-founder of Touring Capital, doesn’t think the boom times will last. “We will soon assess whether genetic AI delivers the promised efficiency gains at scale and drives top-line growth through AI-embedded products and services,” Kumar said. “If these anticipated 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.”
According to Kumar, several high-profile VCs, including Meritech Capital – whose bets include Facebook and Salesforce – TCV, General Atlantic and Blackstone, have is directed clearly of genetic artificial intelligence so far. And genetic AI’s biggest customers, corporations, seem increasingly skeptical of the technology’s promises and whether it can deliver on them.
In a pair of recent surveys by the Boston Consulting Group, about half of respondents — all C-suite executives — said they don’t expect genetic AI to deliver significant productivity gains and are concerned about the potential for errors and data breaches that derived from artificial intelligence generation tools.
But whether skepticism and the economic fallout that can come from it is a bad thing depends on your point of view.
For Padval’s part, he sees the AI industry undergoing a “necessary” correction in “bubble-like investment fervor.” And, in his faith, there is light at the end of the tunnel.
“We are moving at a more sustainable and normalized pace in 2024,” he said. “We expect this steady investment pace to remain for the rest of this year … While there may be periodic adjustments in the investment pace, the overall trajectory for AI investment remains strong and poised for sustained growth.”
We’ll see.
