The AI sector has to face up following a decade of easy money. According to recent research by Stanford’s Institute for Human-Centered Artificial Intelligence (HAI), which tracks developments in artificial intelligence, worldwide investment in intelligence she declined in 2023 for the second consecutive year.
According to the analysis, which uses data from market research organization Quid, both corporation investment mergers and acquisitions and private investment, that is, venture capitalist investments in startups in the AI business, were down in 2023 compared to the previous year.
Acquisitions and mergers of companies associated with artificial intelligence decreased by 31.2% from $117.16 billion in 2022 to $80.61 billion in 2023; private investment decreased from $103.4 billion to $95.99 billion. After accounting for minority share transactions and initial offerings of shares, the total amount invested in artificial intelligence fell to $189.2 billion in 2018, a 20% decrease from 2022.
However, some AI initiatives continue to draw huge investments. For example, Anthropic just received a multibillion-dollar investment from Amazon, while Microsoft recently paid $650 million to acquire the best employees of Inflection artificial intelligence, if not the entire firm. According to the Stanford HAI research, 1,812 AI startups announced funding in 2023, up 40.6% from 2022. It means that more AI companies are getting investments than ever before.
What is happening, then?
According to John-David Lovelock, a research analyst at Gartner, he anticipates investments in artificial intelligence “extending over” as the major firms, including Anthropic and OpenAI, establish their positions.
According to Lovelock, the number of billion-dollar ventures has nearly stopped growing. Investments in large models of artificial intelligence are enormous. Tech firms that will leverage already-existing AI products, services, and solutions to develop new ones are now having a greater impact on the market.
Thomvest Ventures chief executive officer Umesh Padval blames slower-than-anticipated growth for the decline in overall AI investment. He claims that the initial excitement has subsided, and it is now clear that artificial intelligence faces numerous obstacles that will take years to address and overcome completely. These obstacles can be technical or go-to-market.
According to Padval, the decline in investments in artificial intelligence reflects the understanding that we are still in the early stages of the technology’s progress and its use in various industries. Although the market’s future potential is still enormous, the difficulties in expanding artificial intelligence for practical use have dimmed the original excitement. It points to a more sophisticated and smart investing environment.
Seth Rosenberg, an investor at Greylock, argues that funding “several fresh competitors” in the artificial intelligence sector is simply less popular.
In the early stages of this cycle, we witnessed a great deal of funding invested in foundation models, which need a lot of resources, he said. The decrease in investment on the whole dollar level may be because the amount of funding needed to develop artificial intelligence applications and models is smaller than that of other stack components.
There may be other things at work.
According to Tola Capital partner Aaron Fleishman, investors may realize that they have relied too much on “anticipated phenomenal growth” to support the expensive valuations for artificial intelligence businesses. Stability AI, an AI startup estimated at more than a billion dollars in late 2022, is one example of a corporation that purportedly generated only eleven million dollars in sales in 2023 while incurring operational expenses of $153 million.
According to Fleishman, the success tracks of businesses such as Stability AI may indicate impending difficulties. Investors are now assessing AI investments with greater thought than a year ago. Several well-known AI startups’ swift ascent and descent in the last year have demonstrated investors’ need to improve their perspective and comprehension of the chain of value associated with AI and its defensibility inside the stack.
It appears that being “deliberate” is the new standard.
A PitchBook article written for TechCrunch states that in Q1 2024, VCs spent $25.87 billion worldwide for AI businesses, up from Q1 2023 when they invested $21.69 billion. In Q1 2024, however, the investments were distributed among only 1,545 deals, as opposed to 1,909 in Q1 2023. In contrast, mergers and acquisitions decreased from 195 in Q1 2023 to 176 in Q1 2024.
Generative AI, or AI that produces new content like literature, photos, music, and videos, is still a shining light in the eyes of AI investor loops despite the general downturn in the industry.
According to Stanford’s HAI research, investment for generative artificial intelligence firms exceeded $25.2 billion in 2023—nearly nine times the amount spent in 2022 and around thirty times that of 2019. Furthermore, in 2023, over 25% of all AI-related funding went toward generative AI.
However, Touring Capital’s founding member Samir Kumar does not believe the economic recovery period will persist. According to Kumar, we’ll soon assess whether generative AI generates revenue growth using AI-integrated products and solutions and achieves the anticipated efficiency advantages at scale. Revenues from “experimental run rates” may not convert into a steady stream of yearly recurring income if these projected benchmarks aren’t reached and we remain largely in the experimental stage.
To Kumar’s point, several well-known venture capital firms have refrained from investing in artificial intelligence that generates thus far, including Meritech Capital, General Atlantic, TCV, and Blackstone, whose investments include Facebook and Salesforce. Additionally, companies who are generative AI’s biggest clients are growing less certain that the technology can live up to the hype.
About half of the participants in two recent surveys conducted by Boston Consulting Group, who are all C-suite executives, expressed concern about the possibility of errors and data breaches resulting from generative tools powered by AI and expressed doubt that generative AI would substantially improve productivity.
However, depending on your perspective, suspicion, and the potential financial downtrends that result from it may or may not be beneficial.
According to Padval, artificial intelligence is going through a “necessary” correction to its bubble-like investment enthusiasm. Furthermore, he thinks that there is hope for the future.
In 2024, he stated, we will be moving at a more normalized and sustainable speed. We expect this consistent investment pattern to continue for the balance of this year. The general direction for investments in artificial intelligence is still strong and positioned for long-term growth despite the possibility of occasional modifications to the investment rate.
