Investors are pouring billions of dollars into artificial intelligence (AI) startups despite the venture market still recoiling from its 2021 highs. Recent examples of large investments include Microsoft’s multi-billion-dollar investment in OpenAI, Anthropic’s $300 million round from Google, and Cohere’s talks with investors to raise hundreds of millions of dollars. Other AI-based startups have also raised rounds of over $100 million recently. This trend in venture capital funding for AI is reminiscent of the run-ups in Web3 and crypto last year, where startups in these sectors received 29 rounds of $100 million in the first quarter of 2022.
However, it is uncertain whether investors will see the multiples they want from an exit at these valuations. Skeptics question why funding for AI has suddenly exploded over the past few months and where this excitement was just 12 months ago. They wonder if the technology was not developed enough then, but it is now. In the past, big data, machine learning, and various cybersecurity-related acronyms also attracted the attention of venture capitalists, but soon faded away.
Despite the skepticism, every startup is now using AI in its description, and every investor and firm wants in on the next hot deal in AI. This enthusiasm is driving enormous valuation spikes, making it challenging to get the returns venture capitalists need for successful exits. While AI has significant tailwinds, such as the democratization of technology and the advancements in computer technology that make AI more efficient, public investors remain unsure and uneasy about the new AI craze.
Alphabet, the parent company of Google, recently lost $100 billion in market value after its AI tool, Bard, incorrectly answered a question about the James Webb Space Telescope. This incident shows the fragile confidence public investors have in relatively new tech tools, at least in their new use cases. Nevertheless, it is unlikely that AI, Web3, and decentralized finance are going anywhere, despite the battering startup valuations have taken in these sectors.
In conclusion, while venture capital funding for AI startups has increased significantly, it remains uncertain whether investors will achieve the returns they want from their investments. The recent history of run-ups in Web3, crypto, and other sectors that attracted venture capitalists’ attention suggests that investors should be cautious when investing in AI.
