A recent report from Stanford’s Institute for Human-Centered Artificial Intelligence (HAI) revealed that global investment in AI took a nosedive for the second consecutive year in 2023.
The report, drawing from data provided by market intelligence firm Quid, highlights a downturn in both private and corporate investment within the AI industry compared to the previous year.
Taking into account minority stake deals and public offerings, the total investment in AI dwindled to $189.2 billion last year, reflecting a notable 20% decline compared to 2022.
Specifically, AI-related mergers and acquisitions plummeted from $117.16 million in 2022 to $80.61 million in 2023, marking a significant 31.2% decrease. Similarly, private investment dipped from $103.4 million to $95.99 million during the same period.
Despite these overarching declines, certain AI ventures are still managing to secure substantial investments. For instance, Anthropic recently secured a multimillion-dollar investment from Amazon, while Microsoft made a $650 million acquisition of Inflection AI.
Moreover, the report sheds light on a positive aspect amidst the gloom: the number of AI companies receiving investments has surged. In 2023, 1,812 AI startups announced funding, marking a remarkable 40.6% increase compared to the previous year, according to the Stanford HAI report.
Ongoing Trend
According to Gartner analyst John-David Lovelock, the investment in AI is evolving with major players like Anthropic and OpenAI expanding their influence.
“The count of billion-dollar investments has slowed and is all but over,” said Lovelock.
“Large AI models require massive investments. The market is now more influenced by the tech companies that’ll utilize existing AI products, services, and offerings to build new offerings.”
John-David Lovelock
Umesh Padval, managing director at Thomvest Ventures, attributes the shrinking overall investment in AI to slower-than-expected growth. The initial wave of enthusiasm has given way to the reality, he said that AI is beset with challenges — some technical, some go-to-market — that’ll take years to address and fully overcome.
“The deceleration in AI investing reflects the recognition that we’re still navigating the early phases of the AI evolution and its practical implementation across industries.”
“While the long-term market potential remains immense, the initial exuberance has been tempered by the complexities and challenges of scaling AI technologies in real-world applications … This suggests a more mature and discerning investment landscape.”
Umesh Padval
Other Factors Could be Afoot
Greylock partner Seth Rosenberg contends that there’s simply less appetite to fund “a bunch of new players” in the AI space.
“We saw a lot of investment in foundation models during the early part of this cycle, which are very capital intensive,” he said.
“Capital required for AI applications and agents is lower than other parts of the stack, which may be why funding on an absolute dollar basis is down.”
Seth Rosenberg
Aaron Fleishman, a partner at Tola Capital, said investors might be coming to the realization that they’ve been too reliant on “projected exponential growth” to justify AI startups’ sky-high valuations.
For instance, AI company Stability AI, which was valued at over $1 billion in late 2022, reportedly brought in just $11 million in revenue in 2023 while spending $153 million on operating expenses.
“The performance trajectories of companies like Stability AI might hint at challenges looming ahead,” Fleishman said.
“There’s been a more deliberate approach by investors in evaluating AI investments compared to a year ago. The rapid rise and fall of certain marquee name startups in AI over the past year has illustrated the need for investors to refine and sharpen their view and understanding of the AI value chain and defensibility within the stack.”
Aaron Fleishman
“Deliberate” seems to be the name of the game now, indeed.
Despite the prevailing uncertainty among AI investors, there’s a notable exception: generative AI. This category of artificial intelligence, which focuses on creating new content like text, images, music, and videos, continues to shine amidst the overall downturn in investment sentiment.
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