The Coming of the AI Industry’s Reckoning
After years of abundant riches, the AI industry now faces a time of reckoning. The Institute for Human-Centered Artificial Intelligence (HAI) at Stanford University recently released a new report, revealing that global investment in AI has declined for the second consecutive year in 2023.
Both private and corporate investments in the AI industry have experienced a downward trend compared to the previous year.
The report, which draws on data from market intelligence firm Quid, shows a decrease in AI-related mergers and acquisitions from $117.16 million in 2022 to $80.61 million in 2023, a drop of 31.2%. Private investment also declined from $103.4 million to $95.99 million. In total, AI investment reached $189.2 billion in 2023, a 20% decrease from 2022 when accounting for minority stake deals and public offerings.
However, there are still some AI ventures that are attracting significant investments, such as Anthropic, which received a multi-billion dollar investment from Amazon, and Microsoft‘s acquisition of Inflection AI for $650 million. Additionally, the number of AI companies receiving funding has increased, with 1,812 startups securing investments in 2023, a 40.6% increase from the previous year, according to the Stanford HAI report.
So what is causing this change in the AI landscape?
The largest players in the AI space are staking their claim, resulting in a spreading out of investments.
According to Gartner analyst John-David Lovelock, the era of billion-dollar investments in AI may be over. He explains that as AI models become more complex, the cost of investment increases, leading to a shift in the market. The market is now more influenced by tech companies utilizing existing AI products and services to develop new offerings.
Umesh Padval, managing director at Thomvest Ventures, believes that the decline in overall AI investment is due to slower-than-anticipated growth. He states that the initial hype has given way to the challenges of implementing AI at scale, which could take years to overcome. The slowing pace of AI investment demonstrates a more mature and thoughtful investment landscape.
But there may be other factors at play.
There seems to be less of an interest in funding a new wave of AI players.
Seth Rosenberg, a partner at Greylock, suggests that the initial influx of investment in foundational AI models has slowed. These models require a significant amount of capital, and as other parts of the AI stack, such as AI applications and agents, require less investment, the overall funding may appear to decrease.
Aaron Fleishman, partner at Tola Capital, also points out that investors may be realizing that the exponential growth projections used to justify sky-high valuations for AI startups may not align with their actual performance. He uses the example of Stability AI, which was valued at over $1 billion in 2022 but only generated $11 million in revenue in 2023 while spending $153 million on operating expenses. The success of companies like Stability AI may hint at challenges ahead.
Investors are now taking a more measured approach to evaluating AI investments.
This shift in investor attitudes is reflected in a PitchBook report for Q1 2024, which shows that VCs invested $25.87 billion in AI startups globally, up from $21.69 billion in Q1 2023. However, the number of deals decreased from 1,909 to 1,545, and mergers and acquisitions also slowed from 195 to 176.
Yet, amidst these overall trends, there is one area of the AI industry that continues to see growth – generative AI. This technology creates new content, such as text, images, music, and videos, and in 2023, generative AI received $25.2 billion in funding, nearly nine times more than the previous year and over 30 times more than in 2019. Generative AI investments made up over a quarter of all AI-related investments in 2023.
But Samir Kumar, co-founder of Touring Capital, does not believe this boom will last. We will soon have to assess whether generative AI can deliver on its promise of efficiency gains and drive top-line growth through AI-integrated products and services.
He explains that if these milestones are not met, the massive investments in experimental run rates may not translate into sustainable revenue.
Several high-profile VCs, including Meritch Capital, TCV, General Atlantic, and Blackstone, have yet to invest in generative AI, further indicating a sense of skepticism among investors. Corporations, which are the largest customers for generative AI, also express concerns about its potential for substantial productivity gains and worry about mistakes and data breaches. A recent survey by Boston Consulting Group of C-suite executives revealed that about half do not expect generative AI to deliver significant benefits.
However, whether this skepticism ultimately leads to a downturn in AI investments remains to be seen.
In the long run, a correction in the AI industry’s investment landscape may be necessary.
According to Padval, this is a sign of a mature market, and he believes that the stable pace of investment will continue throughout 2024. Although there may be fluctuations, the overall trajectory for AI investment remains strong and poised for continued growth.
We will have to wait and see. Only time will tell the true fate of the AI industry and its investors.
