Investors are growing increasingly skeptical about the generative AI boom, as concerns arise regarding the practicality and competitiveness of the technology. The reliability and commercial potential of generative AI startups are being reassessed, leading to a decline in investments both in terms of numbers and deal size. Pitchbook reports a decrease from 142 investments in April, May, and June to only 101 investments in July, August, and September. Major tech companies, such as Amazon, are dominating the market with heavy investments, further discouraging potential investors. Despite the emerging slump in the venture-capital space, generative AI investments continue to outperform those in the wider tech industry. However, the prevailing trend suggests that investors are becoming more cautious about the actual business viability of generative AI research projects.
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Generative AI deals slowed in Q3
Investors are reevaluating the once-promising boom of generative AI, as concerns about the technology’s applicability and competition with big tech companies rise. According to Pitchbook, investments in generative AI startups have decreased in both the number of investments and the deal size. In the second quarter (April, May, and June), there were 142 investments, compared to only 101 investments in the third quarter (July, August, and September). The cumulative deal value in Q3 was $6.1 billion, with Amazon’s investment in Anthropic accounting for $4 billion of that amount. The deal value in Q3 alone was $4.36 billion, highlighting a significant slowdown in the generative AI market.
Concerns about technology applicability and competition with big tech companies
The recent slowdown in generative AI deals can be attributed to concerns about the technology’s applicability and the fierce competition with big tech companies, particularly Amazon. Investors are questioning the real-world usefulness and reliability of generative AI, particularly in the commercial sector. Despite the high hopes surrounding generative AI and chatbot technologies like ChatGPT, there are still significant concerns about their tendency to produce inaccuracies. As a result, investors are becoming more circumspect about the actual business potential of generative AI research projects.
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Investments in generative AI startups down in Q3
Pitchbook’s data clearly indicates a downtrend in investments in generative AI startups in the third quarter. The number of investments dropped from 142 in the second quarter to 101 in the third quarter. This decrease suggests a loss of momentum in the generative AI market as investors reassess the risks and uncertainties associated with the technology. The decreasing interest in generative AI startups is in line with the overall venture-capital slump in the wider tech space, which has been exacerbated by rising interest rates.
Downtrend in number of investments and deal size
The slowdown in generative AI deals is evident not only in the decreased number of investments but also in the deal size. In Q3, the cumulative deal value was $6.1 billion, but a significant portion of that amount, $4 billion, can be attributed to Amazon’s investment in Anthropic. This means that the deal value excluding Amazon’s investment was only $2.1 billion. Additionally, the deal value in Q3 alone was $4.36 billion, indicating a considerable decline compared to previous quarters. The downward trend in both the number of investments and the deal size underscores the current hesitation and caution among investors in the generative AI market.
Cumulative deal value in Q3 was $6.1 billion
Despite the slowdown in generative AI deals in the third quarter, the cumulative deal value during this period reached $6.1 billion. However, it is worth noting that a significant portion of this value, $4 billion, was driven by Amazon’s investment in Anthropic. This suggests that without Amazon’s involvement, the total deal value would have been significantly lower. The availability of such large investments from major players like Amazon contributes to the overall deal value but also raises questions about competition for smaller startups in the generative AI space.
Amazon’s investment in Anthropic accounts for $4 billion
One notable factor contributing to the cumulative deal value in Q3 is Amazon’s significant investment in Anthropic, amounting to $4 billion. This investment not only boosted the deal value but also highlights the growing interest of big tech companies in generative AI. Amazon’s deep pockets and strategic investments have the potential to shape the direction and dynamics of the generative AI market. However, the substantial involvement of big tech companies can also create challenges for smaller startups in terms of competition and market access.
Deal value in Q3 at $4.36 billion
The deal value in the third quarter alone was $4.36 billion, reflecting a modest decline compared to previous quarters. This decrease in deal value aligns with the overall slowdown in generative AI deals and the growing scrutiny of the technology’s commercial viability. As investors reevaluate the potential risks and returns associated with generative AI investments, the market is experiencing a waning momentum. The declining deal value underscores the cautious attitude towards generative AI and the need for further advancements and reliability in the technology.
Momentum in market wanes as interest rates rise
The generative AI market’s momentum has diminished in recent months, coinciding with the rise in interest rates. The wider tech space is currently experiencing a venture-capital slump, and this trend has impacted investments in generative AI startups as well. The increased uncertainty and risk associated with generative AI, coupled with higher borrowing costs, have likely contributed to the hesitation among investors. The market’s waning momentum signals a need for more convincing and reliable generative AI solutions to reignite investor interest.
Reliability issues with generative AI technology
One of the primary concerns leading to the slowdown in generative AI investments is the reliability of the technology. Generative AI, including chatbot technologies like ChatGPT, is still considered too prone to inaccuracies to be deemed reliable enough for widespread commercial applications. This reliability issue poses challenges for investors and potential customers who require a high level of accuracy and dependability. The industry must address these concerns and make substantial improvements to boost confidence in generative AI and facilitate its broader adoption.
Generative AI investments outperforming wider tech space
Although generative AI deals have slowed down in recent months, they continue to outperform the wider tech space in terms of investment performance. Despite the current slowdown, generative AI startups have attracted significant investments, with a cumulative deal value of $6.1 billion in Q3. Compared to other tech sectors experiencing a venture-capital slump, generative AI investments remain relatively strong. This suggests that despite the concerns and uncertainties surrounding the technology, generative AI still holds promise and is viewed as a potentially lucrative area for investment.
Examples of recent generative AI investments
Despite the overall slowdown in generative AI deals, there have been notable investments in the field. In August, the Israeli AI company AI21 raised $155 million, signaling continued investor interest in the sector. Additionally, in September, the medical AI assistant company Corti secured $60 million in funding, highlighting the potential applications of generative AI in healthcare. Another significant investment was made in mid-September, as the data analytics and AI platform Databricks raised over $500 million from investors including Nvidia and T. Rowe Price. These examples demonstrate the ongoing interest in and potential of generative AI, even amid the current slowdown in deals.
