Finance Association, April 16 (Editor Huang Junzhi) After years of easy financing, the artificial intelligence (AI) industry is facing a capital re-examination. According to the latest report from the Stanford Institute of Artificial Intelligence (Human-Centered Artificial Intelligence, HAI for short), global investment in artificial intelligence declined for the second year in a row in 2023.

The report cites data from market intelligence firm Quid as saying that private investment (that is, investment in startups) and corporate investment (mergers and acquisitions) in the artificial intelligence industry declined in 2023 compared to the previous year.

Specifically, AI-related mergers and acquisitions fell 31.2% from US$117.16 billion in 2022 to US$80.61 billion in 2023; private investment fell from US$103.4 billion to US$95.99 billion. Taking into account minority equity transactions and public offerings, total external capital investment for artificial intelligence fell to US$189.2 billion last year, down 20% compared to 2022.

However, some AI companies are still attracting large amounts of capital. For example, Anthropic recently received billions of dollars in investment from Amazon, and Microsoft “emptied” the top talent in Inflection AI with 650 million US dollars. According to the HAI report, there are more AI companies receiving investment than ever before. In 2023, 1,812 AI startups announced that they will receive investment, an increase of 40.6% over 2022.

Reflections after the boom

Umesh Padval, managing director of Thomvest Ventures, attributed the contraction in overall capital investment in artificial intelligence to lower-than-expected growth. He said that initial enthusiasm has given way to reality: artificial intelligence faces many challenges — some technical, some entering the market — and these challenges will take years to solve and fully overcome.

“The slowdown in investment in artificial intelligence reflects the recognition that we are still in the early stages of AI development and its practical application in various industries. Although the long-term market potential is still huge, the complexity and challenge of using artificial intelligence technology in real-world applications has dampened the initial boom... This shows that the investment environment is more mature and sharp.” he said.

Other factors may also play a role.

Seth Rosenberg, a partner at the American venture capital firm Greylock Partners (Greylock Partners), believes that people are less and less interested in investing in “a group of new players” in the field of artificial intelligence.

He said, “We saw that in the early stages of this cycle, a large amount of capital was invested in the basic model. This is a very obvious capital-intensive project. “Artificial intelligence applications and agents require less capital than the rest of the stack, which may be one reason for the decline in funding.”

Aaron Fleishman, partner at venture capital firm Tola Capital, said investors may be aware that they are too reliant on “expected exponential growth” to justify sky-high valuations of AI startups. For example, the artificial intelligence company Stability AI was valued at over 1 billion US dollars at the end of 2022. According to reports, the company's revenue in 2023 was only 11 million US dollars, while operating expenses were 153 million US dollars.

“Compared to a year ago, investors are taking a more prudent approach in evaluating AI investments. The rapid rise and fall of some well-known startups in the field of artificial intelligence over the past year shows that investors need to improve and improve their views and understanding of the AI value chain and defense capabilities.” he said.

Data shows that in the first quarter of 2024, venture capital firms invested US$25.87 billion in global artificial intelligence startups, up from US$21.69 billion in the first quarter of 2023. However, compared to 1909 transactions in the first quarter of 2023, the investment in the first quarter of 2024 involved only 1,545 transactions. Meanwhile, M&A transactions have slowed from 195 in the first quarter of 2023 to 176 in the first quarter of 2024.

Generative artificial intelligence

Although the investment community's enthusiasm for AI is declining, generative artificial intelligence (artificial intelligence that generates new content such as text, images, music, and video) is still a highlight.

According to the Stanford University HAI report, in 2023, capital investment in generative artificial intelligence startups reached 25.2 billion US dollars, almost 9 times that of 2022, and about 30 times that of 2019. The agency expects generative AI to account for more than a quarter of all AI-related investments by 2023.

However, Samir Kumar, co-founder of venture capital firm Touring Capital, believes that the boom period will not last.

“We will soon evaluate whether generative AI can improve efficiency on a large scale and drive revenue growth through AI integrated products and services. If these anticipated milestones are not met, we are still experimental and unable to achieve sustainable annual recurring revenue.” he said.

Similar to their views, several well-known venture capital firms, including Meritech Capital (which invests in Facebook and Salesforce), TCV, General Atlantic, and Blackstone Group (Blackstone) have so far avoided generative artificial intelligence. And companies, the biggest customers that generate artificial intelligence, seem increasingly skeptical that the promise of this technology can be fulfilled.

In two recent Boston Consulting Group (Boston Consulting Group) surveys, about half of the respondents (all executives) said they don't want generative AI to bring substantial productivity gains, and they are concerned that generative AI tools may cause errors and data breaches.