After years of making easy money, the artificial intelligence industry is facing a reckoning.

A new report from Stanford University’s Human-Centered Artificial Intelligence Institute (HAI), which studies trends in artificial intelligence, finds that globally Artificial Intelligence investment fell in 2023 for the second consecutive year.

Both private investment (that is, venture capital investment in startups) and corporate investment (mergers and acquisitions) in the artificial intelligence industry are on a downward trend in 2023 compared with the previous year, the report said, citing Data comes from market intelligence company Quid.

AI-related M&A will decline from $117.16 million in 2022 to $80.61 million in 2023 31.2%; Private investment fell from $103.4 million to $95.99 million. Considering minority transactions and public offerings, Total investment in artificial intelligence dropped to $189.2 billion last year, a 20% drop from 2022.

However, some AI companies continue to attract significant funding, such as Anthropic’s recent multi-billion dollar investment from Amazon and Microsoft’s $650 million acquisition of Inflection AI. The Stanford HAI report shows that more artificial intelligence companies are receiving investment than ever before, with 1,812 artificial intelligence startups announcing that they have received financing in 2023, an increase of 40.6% from 2022.

what happens?

Gartner analyst John-David Lovelock said he sees a “proliferation” of AI investments as the largest players such as Anthropic and OpenAI take hold.

“The number of billion-dollar investments has slowed down and is almost over,” Lovelock told TechCrunch. “Large-scale AI models require significant investment. The market is now more influenced by technology companies that will leverage existing There are artificial intelligence products, services and products to build new products.”

Umesh Padval, managing director at Thomvest Ventures, attributed the overall shrinking investment in artificial intelligence to lower-than-expected growth. The initial wave of enthusiasm, he said, has given way to reality: AI faces challenges — some technical, some marketing — that will take years to solve and fully overcome.

“The deceleration in AI investment reflects the recognition that we are still in the early stages of the development of AI and its practical implementation across industries,” Padwal said. “While the long-term market potential remains substantial, the initial boom has been tempered by the The impact of the complexities and challenges of scaling AI technology in real-world applications…suggests a more mature and insightful investment environment.”

Other factors may be at play, too.

Seth Rosenberg, a partner at Greylock, believes that interest in funding “a new set of players” in artificial intelligence is simply not that strong.

“In the early stages of this cycle, we saw a lot of investment in underlying models, which are capital intensive,” he said. “AI applications and agents require less capital than other parts of the stack, which may be why absolute dollar funding is down.”

Aaron Fleishman, a partner at Tola Capital, said investors may come to realize that they have relied too much on “projected exponential growth” to justify the sky-high valuations of artificial intelligence startups. For example, artificial intelligence company Stability AI, which was valued at more than $1 billion at the end of 2022, reported revenue of just $11 million in 2023 and operating expenses of $153 million.

“The performance trajectory of companies like Stability AI may be a hint of the challenges ahead,” Fleishman said. “Investors are taking a more cautious approach when evaluating investments in artificial intelligence than they were a year ago. The rapid rise and fall of some well-known startups in the field of artificial intelligence over the past year demonstrates the need for investors to refine and deepen their understanding of A defensive perspective and understanding within the AI ​​value chain and stack.”

In fact, “thoughtful” seems to be the name of the game now.

Venture capital invested $25.87 billion in AI startups globally in the first quarter of 2024, up from $21.69 billion in the first quarter of 2023, according to a PitchBook report compiled for TechCrunch. But investments in the first quarter of 2024 only involved 1,545 deals, compared with 1,909 in the first quarter of 2023. At the same time, it slowed from 195 in the first quarter of 2023 to 176 in the first quarter of 2024.

Despite the general slump in the AI ​​investor community, generative AI—artificial intelligence that creates new content such as text, images, music, and video—remains a bright spot.

FAccording to the Stanford University HAI report, investment in generative AI startups will reach $25.2 billion by 2023, almost nine times the amount invested in 2022 and about 30 times the amount invested in 2019. Generative AI will account for more than a quarter of all AI-related investments in 2023.

However, Touring Capital co-founder Samir Kumar doesn’t think the boom will last. “We will soon evaluate whether generative AI can deliver the promised efficiency gains at scale and drive revenue growth through AI-integrated products and services,” Kumar said. “If these anticipated milestones are not met, And we’re still largely in the experimental phase, so revenue from ‘experimental run rates’ may not translate into sustainable annual recurring revenue.”

Kumar believes that several high-profile venture capital firms, including Meritch Capital (whose bets include Facebook and Salesforce), TCV, General Atlantic and Blackstone, have so far shied away from generative AI. Enterprises, the largest customers of generative AI, appear increasingly skeptical of the technology’s promises and whether it can deliver on those promises.

In two recent surveys by the Boston Consulting Group, about half of respondents, all executives, said they did not expect substantial productivity gains from generative AI and that they were worried about the potential for errors and mistake. Data breaches caused by AI-driven generation tools.

But whether skepticism, and the resulting financial downturn, is a bad thing depends on your point of view.

Padwal believes that the artificial intelligence industry is experiencing a “necessary” correction from the “frothy investment enthusiasm.” And, he believes, there is light at the end of the tunnel.

“By 2024, we will move towards a more sustainable and normalized pace,” he said. “We expect this steady investment pace to continue through the remainder of the year…While the investment pace may adjust periodically, the overall trajectory of AI investment remains strong and is expected to continue to grow.”

We will see.

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