Why AI Investment is Slowing Down Despite Hype?
Artificial intelligence has increasingly become a buzzword in modern technology. Although AI has been around for decades, it is only recently experiencing a resurgence of interest with the release of OpenAI’s ChatGPT, which has led to the launch of various generative AI products by big companies such as Microsoft, Google, Salesforce, Box, ServiceNow, and Zoho. Despite this, a recent report from CB Insights shows a pronounced slowdown in AI investment, with AI startups raising only $5.4 billion in the first quarter of 2023, which is 66% less than they did a year earlier, and the number of deals falling 37% to 554.
Where is the investment?
Although big companies are involved in launching AI-related startups, startups related to AI are not launching enough, and the investment is not as pronounced as expected. CB Insights data shows that AI-focused venture capital is declining, as it dropped globally by 43% compared to the final quarter of last year, with American AI startups raising 27% less than they did in Q4 2022, and 60% less than in Q1 2022. However, narrowing it down to AI-focused venture funding in Silicon Valley alone shows that capital raised by AI startups rose by 41%.
Explaining the paradoxical report:
Matthew Marwick, from the Intelligence Unit at CB Insights, says that part of the problem is related to the general slowdown in venture investing that has been experienced over the last year, affecting AI regardless of the hype cycle we find ourselves in. Venture investing deals can last months before closing, which could be why investment momentum is still growing, and we expect it to be more pronounced in the Q2 2023 venture numbers. Moreover, Marwick cautions that we should not expect a return to 2021's frothy investment market anytime soon.
Why is AI facing a slump?
Macroeconomic factors could explain why investors are moving more carefully than we would expect. For instance, economic downturns are dampening venture investment broadly, thereby affecting AI investment. Also, some venture investors are wary of being swept up by a gold rush mentality.
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Why does the global picture matter?
Although OpenAI and other leading lights in the space are U.S.-based, other markets such as Europe, Asia, Latin America, Africa, and Australia account for much less capital. The previous VC boom brought with it some silliness, but also did a lot of work to spread venture capital more broadly. The next chapter of the larger global startup saga, call it the Annals of AI, is not starting on a very equitable footing.
What's the way forward?
Although the downturn was predicated on the collapse of $100 million and larger venture rounds for AI startups, valuations and round sizes are trending better for AI startups than those building with other toolsets, according to data from Carta, a unicorn that helps companies manage their cap tables. As such, we should see more founders in more places pursue AI-powered ideas in hopes of getting a bite of the capital on offer.
AI investment is currently far from reaching the levels people anticipated, despite the hype around the technology. The slowdown in AI investment experienced over the last year affects AI, and we should not expect a return of 2021's frothy investment market anytime soon. Investors are moving more carefully, and it is yet to be seen whether investment momentum will grow in later quarters. However, some signals are promising, such as the fact that valuations and round sizes are trending better for AI startups than those building with other toolsets, which will naturally push more startups and founders in that direction.