In Silicon Valley, billions of dollars of investment in artificial intelligence startups have become almost commonplace – more money raised for artificial intelligence companies exceeded that of all other technology categories combined, reaching $17.9 billion in the third quarter.
According to PitchBook data compiled by Bloomberg, the financing value of global artificial intelligence companies increased by 27% in the third quarter compared with the same period last year. Although the overall transaction volume of global new startups fell 31% from the same period last year, reaching US$73 billion.
The opposite trend lines highlight the divergence between AI startups and the rest of the industry. Rising interest rates and the post-pandemic recession have hammered venture capital, leaving artificial intelligence as one of the lone bright spots in the venture capital world. So-called generative artificial intelligence technology, in particular, has dazzled users and investors and generated billions of dollars for the largest companies with its ability to generate realistic images and human-sounding text based on a few sentence prompts funds.
Some venture capitalists have compared the boom in artificial intelligence to the emergence of the consumer web. “For generative AI, this is the web moment, the HTML moment,” says Insight Partners’ Praveen Akkiraju. Just as the web existed for years before user-friendly interfaces were widely available, he says, artificial intelligence is is booming as easy-to-use programs like OpenAI’s ChatGPT are gaining traction.
The excitement masks a larger decline in tech stocks. While companies like OpenAI dominated the headlines, most tech categories, including IT hardware, healthcare services and consumer goods, saw year-over-year declines, according to PitchBook data.
Even artificial intelligence is not completely immune to the pressure to create new innovations. Total financing in the industry is still lower than it was two years ago, at the height of the pandemic tech boom. Its success has been largely driven by big-money deals at prominent companies, including Anthropic and OpenAI.
The level of AI hype has prompted other companies in the industry to adopt a wait-and-see approach. Take enterprise software, which was hot a few years ago, as an example. During those boom years, venture capitalists were enthusiastic about enterprise software, fueled in part by massive initial public offerings from companies like UiPath Inc. and Snowflake Inc.
One startup benefiting from the 2021 boom is Kong Inc., which helps manage how software applications communicate with each other. The company raised $100 million at a $1.4 billion valuation in a deal led by Tiger Global Management, with other firms including Goldman Sachs Group Inc., Index Ventures and CRV also participating.
Kong founder Augusto Marietti said the company remains in good shape, with more cash flowing into the business than out in recent months. His business has grown along with the artificial intelligence boom, as more artificial intelligence means more data infrastructure, which drives demand for his products. Inevitably, though, the focus has shifted to pure-play AI companies.
During last earnings season, Marietti grew tired of hearing company after company mention artificial intelligence every chance he got. He was pleased with Apple’s earnings report, which the company’s earnings report didn’t mention, but Apple’s stock price soared nonetheless.
Marietti said Kong is integrating artificial intelligence capabilities, but that doesn’t mean it is an artificial intelligence company. That also doesn’t mean it can’t continue to grow and become very profitable.
“We don’t need an identity crisis,” he said. “Stick to it.”
Svlook
