Lousy U.S. economic conditions dampen 2023 venture investments, but not for generative AI

It's a race for generative AI applications among the big techs and the smaller players alike

If the year 2022 was a sluggish year for private equity deals, 2023 was outright lethargic. Rising interest rates, inflation, and fears of a recession, not to mention the aid to Ukraine and other geopolitical involvement by the U.S.  These risks pulled brakes on the capital flows over the course of the year and have not been resolved as we enter 2024. However, there was one sector where VCs continued to invest big. You may have guessed it: generative AI.

AI-related startups raised close to $50 billion last year, according to Crunchbase. The analytics platform counted more than 70 fundraisings by startups developing large language models for chatbots, applying AI to create visuals, or setting up platforms for generative AI applications. And three AI developers attracted billions of dollars each; these were OpenAI, Anthropic, and Inflection AI.

Starting with OpenAI, the developer of ChatGPT gained a cumulative $10.3 billion in its Series E round. Its main investor has been, of course, Microsoft, which signed off on the $10 billion a year ago. Other investors joined in in April with an additional $300 million, and included Sweden’s Flat Capital, NYC-based Tiger Global Management, and Sequoia Capital.

Now, OpenAI is in discussions to raise new funds of up to $10 billion from Abu Dhabi-based AI company G42, Bloomberg reported. With this deal, OpenAI’s valuation would exceed $100 billion.

Next up, Anthropic raised nearly $7 billion in 2023, with Amazon, Google, Spark Capital and Salesforce Ventures in San Francisco, Ashton Kutcher’s Sound Ventures, and others as its backers. Founded by former OpenAI employees who disagreed on the commercial direction it adopted, Anthropic is building its own generative AI systems that it describes as “helpful, harmless, and honest” that will include Claude, an AI assistant akin to ChatGPT.

Lastly, Pi chatbot creator Inflection AI reached $4 billion valuation last summer after its $1.3 billion fundraising. Inflection AI was launched in 2022 by the co-founders of DeepMind and LinkedIn, and it’s been backed by Microsoft, chip giant Nvidia, Bill Gates, and former Google CEO Eric Schmidt. Pi is seen as one of ChatGPT’s main rivals, and positions itself as a more “personal” AI assistant that aims to offer “friendly” advice based on a user’s interests.

Other AI startups making headlines in 2023 were Jurassic, developed by Israeli startup AI21 Labs, Elon Musk’s Grok, developed by xAI and unveiled in November, text-to-image company Stability AI, and Hugging Face, which provides tools for building machine learning applications.

On a side note, some of the headlines brought to surface the negative aspects of generative AI, such as child exploitation images in the database of Stable Diffusion’s AI model and the problem of deepfakes brought upon by AI-generated images not labeled as such.

Here are some other noteworthy 2023 fundraisings by startups applying AI and generative AI. Los Angeles-based startup Metropolis raised $1.1 billion as it delivers its checkout-free parking system powered by AI and computer vision. Alphabet spinoff Sandbox AQ raised $500 million in February to research AI and quantum technologies; among its investors are Breyer Capital, Salesforce, and the aforementioned Eric Schmidt, who is also the startup’s chairman. Germany’s Aleph Alpha and France’s Mistral AI won about $500 million each as they build their European rivals to OpenAI.

These were just some of the biggest deals, with a lot more startups applying AI to niches like health technology, edtech, corporate culture, cybersecurity, events and marketing, fintech, and automation, to name a few – and getting millions of dollars in backing while at it. In fact, Crunchbase estimated that 25% of all capital invested into U.S. startups in 2023 were in the generative AI space.

Going into 2024, Pitchbook analysts expect VC deals to increase, but not to exceed the level of 2020. None of the slowdown factors are yet resolved, though inflation has cooled down. Moreover, the looming elections make it an unpredictable year for the capital markets. In private equity, AI is likely to remain a hot topic among VCs, but some analysts say the valuations of these startups may witness a cooldown.

Images used in part from: Rawpixel & others