Are Global Investors Weary of AI?

Are Global Investors Weary of AI?

As discussions rage around the sustenance of the current AI boom following concerns over the possibility of a model collapse, the global investor community appears to have tightened their purse strings when it comes to funding AI-led startups. What’s more, even corporate investments in the form of mergers and acquisitions also showed signs of lagging. 

This was the key finding of a new report from the Institute of Human-Centered Artificial Intelligence (HAI) of Stanford, which suggests that the industry should brace itself for a slump in global investments, which fell for the second year in a row during 2023. 

Both private investments and corporate investment showed a downswing in the AI industry during 2023 versus a year ago, which uses market intelligence from Quid to base its report. Both venture capital funds in startups as well as mergers and acquisitions across the industry showed signs of lag during the year. (Read the full report here)

AI is under duress, but GenAI is a bright spot

While mergers and acquisitions fell from $117.16 billion in 2022 to $80.61 billion in 2023 (down 31%), private investments declined from $103.4 billion to $95.9 billion. After factoring in minority stake deals and public offerings, total investments in AI declined to $189 billion, which was 20% lower than in 2022. 

Amidst this slump, the one bright spot continued to be GenAI. Fundings touched $25.2 billion in 2023, which was nine times that in 2022 and not surprisingly accounted for a quarter of all AI-led investments during the year. However, market analysts believe that this trend was too good to last. 

Unless GenAI use cases do not deliver on the promised efficiency at scale and drive top-line growth, there could be concerns and investments would be sized up around the premise that the experimental phase of these innovations may continue for some more time. Which means they might not transition into sustainable recurring revenues. 

In fact, a survey conducted by Boston Consulting Group had half the respondents amongst the C-suite actually not expecting AI to bring rapid and substantial productivity gains. On the other hand, most are worried that there could be potential errors and data compromises that could hamper their use of GenAI-powered tools.

“This is the year to turn GenAI’s promise into tangible business success,” said Christoph Schweizer, BCG’s CEO. “Almost every CEO, myself included, has experienced a steep learning curve with GenAI. When technology is changing so quickly, it can be tempting to wait and see where things land. But with GenAI, the early winners are experimenting, learning, and building at scale.”

Investments are growing, but getting spread around

A blog post by HAI notes that private investments in GenAI spiked from around $3 billion in 2022 to $25 billion in 2023 with almost 80% of Fortune-500 companies mentioning AI during their earnings calls. However, it quoted Pew data to note that public sentiment took a dip with 52% of respondents across the globe feeling nervous as against 38% in 2022. 

“This year, we see more models able to perform across domains,” said Vanessa Parli, Stanford HAI director of research programs. “Models can take in text and generate audio or take in an image and generate a description. An edge of the AI research I find most exciting is combining these large language models with robotics or autonomous agents, marking a significant step in robots working more effectively in the real world.”

However, some AI ventures continued to beat this trend with substantial funding such as Anthropic’s recent multi-billion dollar deal with Amazon and Microsoft’s $650 million acquisition of Inflection AI’s top talent. The latter even led to some ethical questions around talent acquisition as a means to subvert antitrust regulation. 

What’s causing the concerns? Is there a way out?

The report also notes that more startups in the AI space received funding than ever before in 2023 with the number standing at 1,812 and representing a 40% spike compared to 2022. However, market analysts believe that AI investments are now spreading out as the number of billion dollar investments is almost done and dusted.  

A report published by TechCrunch quotes Gartner analyst John-David Lovelock to suggest that since large AI models require big monies, the market is shifting towards tech companies that can utilize existing AI products, services and offerings to build new innovations. Moreover, the slower-than-anticipated growth in use of AI is another major factor. 

Some analysts hold the view that investors could be rationalizing their expectations around growth prospects of AI startups and whether their valuations are justified. There are several cases where high valuations haven’t seen commensurate revenues being generated over the past two or three years and hence a recalibration is only to be expected. 

Maybe, it is all for the greater good!

The article quotes from a PitchBook report to suggest that VCs invested $25.8 billion globally in AI startups during Q1 of 2024 as against $21.6 billion in the same quarter of 2023. However, these spanned across 1,545 deals as against 1,909 in 2023 while mergers and acquisitions slowed from 195 in Q1 of 2023 to 176 in the first quarter of 2024. 

Challenges related to the high cost of infrastructure spend, the massive data centers raising net-zero concerns as well as the go-to-market challenges around untested models might take a few years to overcome. 

Therefore, it is safe to say that the early euphoria may be done for now and what follows would be a more mature and discerning investment climate.


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