Venture Investments in Generative AI Take a Dip
Venture capitalists were once riding high on the wave of investments in generative artificial intelligence, but now, it's like hitting an unexpected ebb in the tide.
Insights from a recent PitchBook analysis highlight declining trends in the generative AI market.
While the third quarter recorded a respectable $6.1 billion (ranking as the second-highest in three years), it pales in comparison to the staggering $11 billion of venture funding amassed in Q1 of 2023.
The decline is attributed to investor skepticism. According to PitchBook, investors are becoming less certain about the readiness of upcoming AI applications for mainstream use.
Pete Flint, a General Partner at the venture capital firm NFX, when interviewed by PitchBook analysts, highlighted a growing sentiment. Early-stage companies in generative AI had embarked on promising experiments, yet many failed to evolve into viable businesses.
The retention and monetization are just not there,Flint points out.
Another concerning trend in the investment market is the decrease in the number of funding rounds during the third quarter. They've seen a 29% reduction from the second quarter, dwindling down to just 101 rounds.
Inspecting the third quarter's investment breakdown this year, the overall value of successful rounds wasn't breaking any records. That was until a $4 billion deal between Amazon and Anthropic shifted the scales, making the quarter one of the most notable.
What's intriguing is that we observed a similar pattern in the first quarter. Of the total $11 billion raised, a hefty $10 billion was attributed to OpenAI's funding round alone.
Venture investments in generative AI over the last three years. Source: PitchBook.png
Regrettably, investment capital isn't infinite—it's not a bottomless pit. Every sector of the economy faces intense competition for investments, and it appears that AI might be losing its competitive edge.
Bryan Offutt, a partner at Index Ventures (a European venture capital company with branches in San Francisco and London), highlighted the substantial promise of generative AI. However, he also pointed out the crucial need for consistent reliability in practical applications, which is currently holding back some of the initial investor excitement.
Momentum is definitely waning as the market comes back to earth. We are living in the messy middle of AI,remarked Offutt.
Yet, despite a broader slowdown in venture capital activity, generative artificial intelligence remains a sought-after investment domain. For instance, in August, AI21 Labs secured $155 million in a Series C funding round. Their contemporaries, Databricks, received a hefty investment of $500 million, while the project Corti garnered $60 million.
Furthermore, big tech companies are still eyeing this sector with interest. Reports suggest that Anthropic aims to drum up an additional $2 billion in funding from investors, Alphabet being one of them. Tim Guleri, the Managing Director of Sierra Ventures (a tech-focused venture firm based in California), encourages fellow investors to view AI's potential through a long-term lens.
The impact we need to be looking through is not through weeks or months, but quarters and years,he says.
