Big techs invest in AI startups more than venture capital companies – 12/28/2023 – Tech

Big Techs have invested far more than venture capital groups in generative artificial intelligence startups this year, seeking to use their financial power to dominate the growing sector.

Microsoft, Google and Amazon struck a series of high-profile deals last year, totaling two-thirds of the $27 billion raised by AI startups in 2023, according to new data from privately held market research firm PitchBook. .

The big investment, which exploded following the launch of OpenAI’s ChatGPT in November 2022, highlights how Silicon Valley’s biggest groups are excluding traditional technology investors from the sector’s biggest deals.

The emergence of generative AI — systems capable of producing human-like video, text, image and audio in seconds — has also attracted major Silicon Valley investors.

But venture capital investors have been outmatched, having been forced to reduce their spending as they adjust to higher interest rates and falling valuations for their companies.

“Over the last year, we’ve seen the market rapidly consolidate around a few fundamental models, with large technology companies coming in and investing billions of dollars in companies like OpenAI, Cohere, Anthropic and Mistral,” said Nina Achadjian, partner at the equity firm US venture firm Index Ventures, referring to some of the top AI startups.

“For traditional venture capital, you had to be early and have conviction — which meant being up to speed on the latest AI research and knowing which teams were leaving Google DeepMind, Meta, and others,” he added.

A series of deals, such as Microsoft’s $10 billion investment in OpenAI, as well as billions of dollars raised by San Francisco-based Anthropic from both Google and Amazon, have helped drive total spending in AI groups to almost three times more than the previous record of $11 billion set two years ago.

Venture investing in technology reached record levels in 2021 as investors took advantage of ultra-low interest rates to raise and deploy large sums across a range of sectors, especially those hardest hit by Covid-19.

Microsoft has also committed to investing $1.3 billion in Inflection, another generative AI startup, in an attempt to get ahead of competitors like Google and Amazon.

Building and training generative AI tools is an intensive process, requiring immense computing power and money.

As a result, startups have preferred to partner with large technology companies, which can provide cloud infrastructure and access to the most powerful chips, as well as financial resources.

This quickly boosted the valuations of privately held startups in the sector, making it harder for venture capital funds to bet on companies at the forefront of technology.

An employee stock sale in OpenAI is seeking to value the company at $86 billion, nearly tripling the valuation it received earlier this year.

“Even the world’s leading venture capital investors, with tens of billions under management, cannot compete to keep these AI companies independent and create new competitors that displace Big Tech incumbents,” said Patrick Murphy, founding partner from Tapestry VC, an early-stage venture capital firm.

“In this AI platform shift, most of the potentially one-in-a-million companies that have emerged so far have already been captured by Big Tech incumbents.”

However, venture capitalists are not absent from the market. Thrive Capital, Josh Kushner’s New York-based company, is the lead investor in OpenAI’s employee stock sale, having previously backed the company this year. Thrive continued to invest even during a drop in venture capital spending in 2023.

Paris-based Mistral has raised about $500 million from investors including venture capital firms Andreessen Horowitz and General Catalyst, and chipmaker Nvidia, since its founding in May this year.

Some venture funds are looking to invest in companies that are building applications that are being developed on top of so-called “fundamental models” developed by OpenAI and Anthropic, in the same way that applications began to be developed on mobile devices in the years following the introduction of smartphones .

“There’s this myth that only fundamental model companies matter,” said Sarah Guo, founder of AI-focused venture capital firm Conviction. “There is a huge space of untapped application domains for AI, and many of the most valuable AI companies will be fundamentally new.”