- Startups in artificial intelligence have resisted the current funding downturn.
- Investors plowed about $25 billion into AI companies in the first three months of 2023.
- Investors see opportunities for specialist AI applications in sub-sectors such as defense.
Warren Buffett has compared AI to the invention of the atomic bomb, but venture capitalists want in.
Since OpenAI’s ChatGPT became the fastest-growing internet app in history, venture capitalists have pivoted to try and identify startups that may capitalize from the AI boom.
The competition between investors is such that it’s fueling valuations, even when startups have little to show publicly by way of revenue. That’s evidenced by the number of would-be OpenAI rivals that have landed big funding rounds since ChatGPT’s launch in November. OpenAI itself is currently valued by investors at around $27 billion.
“There is a premium, some of it makes sense and some of it doesn’t,” Imran Ghory, partner at London-based venture capital fund Blossom Capital, said of the rush. “When there is hype in rounds, the question is: ‘Are they going to get to revenues?’. Some companies grow really fast and we’ve seen that, so there is some premium justification where you’re solving something with real demand — but how much premium, that’s an open question.”
US firm Anthropic, formed by ex-OpenAI staffers, is developing an algorithm for AI self-teaching which could create virtual assistants to pe form tasks like writing emails. The company recently announced $450 million in funding at a mooted $4.1 billion valuation. Other US generative AI startups including Adept, Inflection AI, Pinecone and Runway have all raised major rounds in the last few months.
In Europe, French startup Mistral, founded by former research scientists from Google DeepMind and Facebook-owner Meta, has been in discussions to raise funding, Insider reported in May. Little is known about the company as yet, but investors are piling in in the hope the firm could become Europe’s OpenAI.
AI video generator Synthesia was founded in 2017 and is now anticipated to become a $1 billion-valued firm. Text-to-speech startup ElevenLabs was only founded in 2022 and set to raise at a $100 million valuation.
German AI startup Aleph Alpha, a company which also produces large language models and develops natural language processing, was also in discussions to raise a major round, Insider reported in February.
AI is minting unicorn-valued companies even in the tech downturn
Funding into AI startups was down slightly for the full-year in 2022, matching a broader downturn in tech funding.
But after ChatGPT entered the mainstream at the end of the year, funding picked up. Startups bagged $24.9 billion in the first three months of 2023, up from $23.4 billion the same period last year, per Dealroom data.
And VC funding to generative AI startups specifically, many of which are very early-stage businesses, topped $1.7 billion in Q1 2023, per Pitchbook.
“I don’t think anyone a year ago was saying: ‘We’re going to be pouring into generative AI’,” David Grimm, a partner at AlbionVC, said, adding that early-stage AI startups were looking more attractive than other, more established sectors.
In the broader downturn, investors are also looking to get into the top players such as OpenAI and Anthropic “on the view that they’ll provide services like cloud providers,” said Nathan Benaich, partner at Air Street Capital.
Investors do think about AI wiping out humanity
Benaich noted that while the investment playbook for AI startups is still evolving amid a bout of “manic deal activity”, VCs have started to move away from the generalist use cases, and bet on specific applications of AI.
European startups, which have lagged behind their counterparts in the US when securing funding, could find a “huge opportunity to focus on defense, national security, and tech sovereignty as there’s a dearth of companies in that space,” said Benaich.
Europe’s AI research prowess overtakes the US, with researchers from the EU and UK contributing to 15% of all AI journal publications from 2010 to 2021, compared to the US’ 10%, according to a report from Stanford University. But the continent’s wider AI talent pool lags behind the US, which employs over double the number of AI-skilled professionals as Europe, per a LinkedIn report.
Venture capitalists, usually an optimistic bunch, are thinking about the risks of AI. Many of the field’s leading names, such as Geoffrey Hinton, have warned that the tech could pose a threat to humanity.
“No one wants to invest in AI that’s going to wipe out humanity,” said AlbionVC’s Grimm. “That’s something that all investors need to be concerned about.”