It seems unthinkable, but momentum for generative AI appears to be slowing after captivating VCs and the broader public, leading to a surge in VC funding.
While investment remains high by historic standards, excitement appears to be waning in the sector as large tech companies make waves and investors realize that many generative AI applications may not be ready for prime time.
The number of generative AI deals fell to 101 rounds in Q3, a 29% decline from Q2. Deal value was also on a downward track, but ended higher at $6.1 billion thanks to the blockbuster deal for up to $4 billion that Amazon inked with Anthropic, a provider of large language models, last month.
“Momentum is definitely waning as the market comes back to earth,” said Bryan Offutt, a partner at Index Ventures. Offutt noted that while the technology is impressive, it’s still not reliable enough for most use cases, leading to a loss of investor enthusiasm.
“We are living in the messy middle of AI,” Offutt said.
Generative AI remains hot relative to the broader VC slowdown that has hit other verticals. AI21 Labs, an Israel-based large language model startup specializing in text-based generation, raised a $155 million Series C in August. Databricks, the developer of a data analytics platform with its own Lakehouse generative AI program, recently raised more than $500 million from investors including Nvidia and T. Rowe Price. And Corti, the creator of a generative AI copilot for use in healthcare, raised a $60 million Series B in late September.
But while VCs keep searching for the next OpenAI, many are now acknowledging that early bets may not be panning out. Pete Flint, a general partner at NFX, said there’s a realization now among founders and investors that some early companies were interesting experiments, but not great businesses.
“The retention and monetization are just not there,” he said.
Flint added that Big Tech is looming large over the generative AI space, contributing to the slowdown by potentially scaring away startups and investors. “It’s clear that established digital incumbents and challengers are not asleep at the wheel,” he said.
Microsoft’s $10 billion OpenAI investment, Nvidia’s investment in Cohere’s $270 million Series C, and now Amazon’s up to $4 billion deal with Anthropic (which will make the ecommerce giant an exclusive cloud provider to the startup) are all signs that the Big Tech players are competing fiercely to exploit generative AI’s potential. Anthropic is said to be raising an additional $2 billion from Alphabet and other investors, The Information reported.
Still, some VCs are hopeful that there are more lucrative developments down the pipeline. Tim Guleri, managing director of Sierra Ventures, cautions other VCs to play the long game with generative AI. “The impact we need to be looking through is not through weeks or months, but quarters and years,” he said.
“I wouldn’t even say we’re in the first inning, we’re still in the first couple of pitches,” Guleri added.
Featured image by Marina Inoue/Getty Images
