Tech,  Wealth

AI Investment Frenzy: Will 2024 Be the Year of Abundance or Bust?

The trajectory of AI will persist until 2024 and may even escalate.

Certain individuals accrue annual earnings of $50 million through course sales, while others suffer investor losses due to the sudden emergence of Sora. Simultaneously, some hasten to raise hundreds of billions of dollars to invest in chip infrastructure.

Several AI enterprises, endowed with inherent advantages, have spearheaded the phenomenon of the “double attraction,” drawing both capital and attention. For instance, xAI, an enterprise helmed by Musk, endeavors to procure $6 billion at a $20 billion valuation. Likewise, OpenAI, a renowned entity akin to a beloved delicacy, actively seeks fresh funding rounds, potentially valuing it at over $100 billion.

The novel norm in technology financing in 2023 denotes a contracting “cake,” with AI’s share expanding notably. This trend is anticipated to persist into 2024.

01 Technology Industry’s “Cake” Shrinks

The magnetic allure of AI becomes increasingly conspicuous.

Let us first examine a corpus of data: Figures from the private equity data purveyor, PitchBook, indicate that U.S. investors injected $170.6 billion into startup ventures in 2023, marking a nearly 30% decline from the $242.2 billion of the previous year. Venture capital raised in 2023 hit its nadir since 2015.

This downturn is both temporal and spatial. Spatially, domains ranging from real estate to financial technology to Web3 witnessed stark declines in financing compared to the prior year. Temporally, each quarter fared worse than its antecedent. In the second quarter of 2023, global venture capitalists collectively injected $84 billion, representing a 41% year-on-year decrease.

Amidst this milieu, one sector defies the prevailing winds and burgeons against the tide—AI.

While most industries witness year-over-year diminutions in funding, the artificial intelligence sector manifests the most robust growth trajectory: global AI startup investments are poised to approach $50 billion in 2023, constituting a 9% year-on-year surge, thereby attesting to venture capitalists’ confidence in AI as a harbinger of future growth.

Annual fluctuations in venture capital investment in AI firms (David Borish).

One might find this unsurprising. After all, retrospection reveals prior instances of exuberance towards AI projects. As early as 2021, investors infused $29.5 billion into AI startups.

However, these preceding figures pale in comparison to the colossal sums injected into the industry thus far, particularly in percentage terms.

To grasp how AI’s slice of the funding pie has evolved over time, Crunchbase plotted investments in the domain through August 2023. The data elucidates that from 2018 to 2022, AI startups garnered an average of 12% of total funding—less than half of current levels.

Taking the United States as an exemplar, copious funds cascade into AI startups. Over 25% of investment inflows into U.S. startups gravitate towards AI-related enterprises, marking a substantial uptick compared to previous years (the mean from 2018 to 2022 hovers around 12%). The velocity and quantum of financing eclipse those of other industries.

Prominent among the entities siphoning the largest capital injections are behemoths like OpenAI, Anthropic, and Inflection AI, which collectively raised $18 billion in 2023. Intriguingly, per the latest data from the FT, tech titans’ interest in AI investment over the past year outstrips that of venture capitalists. Noteworthy mentions include Microsoft, Google, and Amazon.

As the progenitor of ChatGPT and DALL-E, OpenAI’s valuation skyrockets to $86 billion; Anthropic, a nascent generative AI startup renowned for its Claude platform, secured $1.25 billion from Amazon, with pledges of up to $4 billion; and startups like Mistral AI, which amassed $113 million within four weeks of its inception, epitomize the frenzied investment climate.

Cohere, specializing in bespoke AI solutions for enterprises, netted $270 million in a recent Series C financing round, valuing it at over $2.1 billion.

This deluge of augmented financing for AI enterprises heralds a novel characteristic—the lion’s share of financing flows to generative AI/large model projects. Concurrently, the ascendancy of generative AI/large models becomes increasingly pronounced, with financing velocities dwarfing those of antecedent computer vision and natural language processing firms. Entities securing financing typically allocate a substantial portion to AI development hardware (e.g., NVIDIA’s H100s and A100s), entailing high costs owing to the indispensable role of hardware in AI training.

In 2023, notwithstanding the overarching contraction in investment, artificial intelligence firms lay claim to a larger slice of the pie. Will this scenario morph into the “new normal” in 2024? Put differently, can one solicit funding in 2024 sans mention of AI? At present, such a proposition appears tenuous.

02 Rationality or Fervor?

Per the latest PitchBook report, the majority of venture capital funds are poised to adopt a stance of “scrutiny” rather than aggression in 2024, with seed-stage deals showing signs of stagnation. KPMG notes that European venture investors similarly espouse a cautious stance, hesitant to commit to major investments given market volatility and dearth of exit avenues, particularly for later-stage investments.

Concurrently, most forecasts portend mounting investor confidence and interest in AI. Goldman Sachs’ latest artificial intelligence report prognosticates that global investment in artificial intelligence could soar to $200 billion by 2025.

This confidence stems from AI’s transition from theoretical abstraction to tangible, everyday tools and applications.

Whether tools such as GitHub Copilot and Replit GhostWriter revolutionize software development via automatic code generation and efficient coding assistance, or platforms like DALL-E and Midjourney empower users to craft intricate, original artwork with minimal prompts, the proliferation of modal AI applications and seamless integration of text, images, and audio challenge conventional product paradigms and service experiences.

At present, AI’s advancement transcends theoretical abstraction, permeating diverse industries and reshaping our modes of work, creation, and entertainment. It burgeons into a palpable technology accessible to the masses, with numerous AI enterprises courting a burgeoning base of paying clientele.

In the contemporary milieu, eschewing AI is deemed regressive. Even if one eschews embedding AI in the final product, internal leveraging for sales enablement, customer support, content marketing, and code generation is deemed imperative for organizational streamlining and efficiency enhancement.

Goldman Sachs’ AI research posits that (generative) AI harbors immense economic potential and could augment global labor productivity by over 1% annually within a decade post-widespread adoption. By 2025, this growth could contribute up to 4% to the GDP of the United States and 2.5% to the GDP of other major investing nations, rivaling the impact of past technological revolutions like electricity and personal computers.

The proliferation of AI applications and their concomitant flourish rekindles imaginations regarding AI’s integration into modern life, further bolstering investor confidence and expectations.

In light of AI’s money-magnetizing trend, Saanya Ojha, a partner at Bain Capital Ventures, posits that investor demand remains undeterred even amidst severe market vicissitudes. The differential lies in the propensity to invest, as valuation multiples regress from above-average periods to historical averages.

She contends that AI ought to be perceived as an augmentation technology rather than a platform-shifting one, hence accruing maximal benefits for companies endowed with extant data and distribution channels or harboring first-mover advantages.

Chad Cardenas, founder and CEO of The Syndicate Group (TSG), underscores that the prevailing market presents a veritable once-in-a-lifetime investment opportunity for entities with adequate financial wherewithal and access to pertinent channels, as valuations remain reasonable and novel technologies continue to emerge.

“While funding may dwindle for subpar and average entities, exceptional enterprises continue to attract investments, rendering them more discoverable to investors. Additionally, such entities command more reasonable valuations, thereby necessitating lesser investment outlays,” he avers.

Amidst discussions on AI enterprises’ allure, it is imperative to underscore that AI’s ascendancy should not be construed as a harbinger of decline for other industries. AI, as a tool, has never operated in isolation but rather as a suite of applications deployable across myriad industries. In the era of AI, a company may transmute into a real estate AI enterprise, a financial technology AI enterprise, a biotechnology AI enterprise, and so forth.

In essence, as AI ascends, all realms burgeon, refraining from the notion that AI vampirically drains vitality from other sectors.

In fact, to a certain extent, today’s artificial intelligence financing fervor bears semblance to the internet frenzy of over two decades prior. Back then, the possession of a website sufficed to proclaim oneself an “internet company,” thereby engendering a deluge of funds.

In such times, vigilance should be exercised alongside heightened olfactory acumen. As Saanya Ojha opines, the prerequisites for investors in the AI era remain largely unchanged. While AI holds significance, investors prioritize teams of exceptional caliber poised to tackle monumental challenges in a scalable and profitable manner.

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