VCs Invest Billions in Generative AI Startups Despite Challenges

Investments in generative AI startups, which create AI-powered products to generate text, audio, video, and more, are not slowing down. However, these investments are becoming concentrated in a smaller number of early-stage ventures.

Investment Trends in Generative AI

According to Crunchbase data shared with TechCrunch, 225 generative AI startups raised $12.3 billion from VCs in the first half of 2023, from January to July 16. If this trend continues, generative AI companies could match or exceed the $21.8 billion raised in 2023.

Breakdown of H1 2024 Investments

• Angel/Seed Deals: 198 deals totaling $500 million

• Early-Stage Deals: 39 deals totaling $8.7 billion

• Late-Stage Deals: 18 deals totaling $3.1 billion

Early-stage startups have been the biggest beneficiaries, with significant investments in companies like Elon Musk’s xAI ($6 billion in May), China’s Moonshot AI ($1 billion in February), Mistral AI ($502.6 million in June), Glean ($203.2 million in February), and Cognition ($175 million in April).

VCs Betting on Big Startups

Chris Metinko, an analyst and senior reporter at Crunchbase, notes that investors are focusing on startups they believe have the highest chances of success while letting others "wither away" at earlier stages. He adds that potential legal and regulatory issues for AI companies could slow down the influx of AI funding. He went on to say, “Others point to the fact that when the mobile revolution occurred more than a decade ago, the biggest winners when it came to the foundational infrastructure layer ended up being well-established tech companies.”

Legal and Data Challenges

Generative AI models are typically trained on publicly sourced data, but the legality of using copyrighted material remains unclear. Some companies have started to secure licensing deals with copyright holders. High-quality training data is becoming harder and more expensive to obtain, with estimates suggesting the market for AI training data will grow from $2.5 billion to $30 billion within a decade. Training models is also becoming increasingly costly, with OpenAI’s GPT-4 costing $78 million to train and Google Gemini’s training expenses reaching $191 million.

Profitability and Market Outlook

Few generative AI startups are currently profitable, including major players like OpenAI and Anthropic. OpenAI, reportedly generating around $3.4 billion in revenue, could lose $5 billion this year, according to The Information. Investors, including big tech companies like Google, Amazon, and Nvidia, view generative AI investments as long-term strategic bets. However, the viability of these investments depends on generative AI startups overcoming significant challenges.