VCs continue to pour dollars into generative AI

The appetite for generative AI — AI that turns text prompts into images, essays, poems, videos and more — is insatiable. And the investment dollars keep flowing, not shockingly.

According to a PitchBook report released this month, VCs have steadily increased their positions in generative AI, from $408 million in 2018 to $4.8 billion in 2021 to $4.5 billion in 2022. Angel and seed deals have grown, as well, with 107 deals and $358.3 million invested in 2022 compared with just 41 and $102.8 million in 2018.

Crunchbase broke down some of the biggest winners in an early February dispatch. In the video category, WSC Sports, which uses AI to generate personally tailored video clips for sports fans, landed $100 million in Series D funding nearly a year ago. In the writing space, Jasper, developer of a platform that helps create and vet original marketing content, raised $125 million in an October round led by Insight Partners, valuing it at over $1 billion.

The surge in interest from early-stage VC companies alone is staggering, with a total of $2.2 billion raised in 2022. Language model developer Anthropic has secured a whopping $1.3 billion in VC funding. OpenAI has raised over $1 billion. Cohere, Inflection and Stability AI have all raised over $100 million, which are all very respectable sums.

So why the massive influx of cash?

First, the declining cost of training cutting-edge machine learning tech and advances in research have propelled both in-house teams and startups alike. Models like the open source text-generating GPT-Neo and text-to-image Stable Diffusion made it possible for ventures large and small to jump on the generative AI train, while open efforts such as EleutherAI, which developed GPT-Neo, have made available models that previously would’ve been gatekept by large commercial labs (e.g., DeepMind).

Another factor driving the generative AI investment is the increased interest from public cloud providers. Recognizing the revenue opportunity, providers are making significant acquisitions and striking generous partnerships to get ahead of the rest of the crowd.

Microsoft invested billions — reportedly $10 billion — in OpenAI in exchange for the latter’s recommitment to use its Azure platform for AI development; Alphabet has struck cloud compute deals with AI startups, including Anthropic and Cohere. AWS inked a partnership with Stability AI, which partially funded the creation of Stable Diffusion, to become Stability AI’s preferred cloud provider.

Finally, businesses — and, by extension, investors — are beginning to realize the profitable applications of generative AI, which continues to grow more sophisticated as the research advances. Companies like Citadel are reportedly negotiating enterprisewide licenses for text-generating AI, such as OpenAI’s ChatGPT, because of the measurable productivity increases. In fact, according to one recent survey, 60% of CIOs plan for AI to gain widespread use across departments by 2025 — particularly in sales, product development and HR.

Some firms are anticipating explosive growth in productivity thanks to AI. Skyquest reports that AI will contribute $15.7 trillion to the global economy over the next few years, with $6.6 trillion coming from increased productivity and $9.1 trillion coming from consumer surplus.

According to a new industry report by Skyquest, AI will contribute $15.7 trillion to the global economy, with $6.6 trillion coming from increased productivity and $9.1 trillion coming from consumer surplus.

Big numbers on the consumer side are no doubt catching VCs’ attention, as well. ChatGPT reached 100 million monthly active users faster than any tech productivity app at two months, surpassing TikTok’s nine months to achieve the same feat, according to UBS analysis. Meanwhile, AI slide deck software startup Tome claims to have achieved the fastest time to 1 million users for a productivity app.

Virility doesn’t always translate to success, but it can move the needle.

Assuming the current trend holds, PitchBook anticipates that generative AI will expand the market for AI software to $42.6 billion in 2023. That includes budgets enterprises are already dedicating to third-party AI software, including AI core and applications. But even without accounting for the potential of generative AI to grow the total addressable market of AI software, PitchBook projects that the market is on pace to reach $98.1 billion by 2026.

“Generative foundation models are still in their infancy, but this presents an exciting chance for basic innovation to produce better user experiences,” the coauthors of the PitchBook report write. “And as model capabilities continue to advance, new business models and applications will likely emerge, including exciting experiments with video, voice, scientific publications, and databases.”