When Microsoft Corp. pledged in January to put $10 billion into OpenAI LLC, it put a huge exclamation point on investor interest in generative AI that had been building over the last several years.
With that single, multi-year deal, Microsoft's bet on OpenAI topped the $9.6 billion invested globally between 2019 and 2022 in all generative AI startups, according to PitchBook Data.
And where there are billions of dollars being invested, hordes of startup founders will follow.
"People are seeing what generative AI can do and there is no way they are going back to the way they were doing those things before," said Kanu Gulati of Khosla Ventures, which was an early backer of OpenAI. "Companies, big or small, who aren't looking at ways to use this are going to miss the boat."
Gulati believes generative AI is in the early innings of its development and its full potential won't be known for some time. One thing that is known, however, is "we won’t be going back to a world where generative AI doesn’t exist," she said.
In a recent CB Insights report, the business analytics company found that more than two-thirds of the generative AI startups that existed in late January hadn’t even raised a Series A round yet.
That report placed the number of startups working on generative AI at 250 in late January. But others in Bay Area's venture capital industry think CB Insights undercounted and that the actual number could be double.
Booms like this one — which kicked into gear when OpenAI launched its ChatGBT chatbot last November — spark comparisons to the big venture and startup busts of the past. Think of the dotcom frenzy at the turn of the century, or the more recent roller coaster rides in crypto and the metaverse. They raise the question, is there real value being created here?
Gordon Ritter of Emergence Capital in San Francisco has doubts. Ritter told the Financial Times last month that while generative AI is a significant technology, he can't figure out a way to make money on startups that are using it.
"Everyone has stars in their eyes about what could happen," Ritter said. "There’s a flow (of opinion that AI) will do everything. We’re going against that flow.”
But as funding totals demonstrate, there are plenty of VCs who disagree. Andreessen Horowitz — the high-profile Menlo Park-based firm that's also known as a16z — made 21 investments in generative AI startups from 2018 through March 10 of this year, according to PitchBook Data.
Two of the firm's partners, Connie Chan and Justine Moore, wrote in a report last month that generative AI "will be the next major platform" for startup founders to develop new products. "Much as the iPhone revolutionized our daily interaction with technology—spawning products like Uber, DoorDash, and Airbnb — generative AI will change everyday life," Chan and Moore wrote.
Sonya Huang of Sequoia Partners, another top generative AI investor, told Bloomberg TV in February that the technology isn’t like overhyped startup trends of the past.
"Whenever there is a platform shift, it opens the door for founders to build new and daring legendary companies," Huang said. "And that's exactly the gold rush that we’re seeing right now in the startup ecosystem."
Bank of America analysts called the generative AI boom an "iPhone moment" in a recent report. "If data is the new oil, then AI is the new electricity," they said, pegging the global value that they think the technology could hit at $900 billion by 2026.
Startups that are involved in some type of text generation have been the top recipients of generative AI investment, according to CB Insights. Between the start of 2021 to the end of January, it said that there had been $852 million in equity funding done across 48 deals.
But not all of the investment is happening in startups. For example, Altimeter Capital, a Boston-based firm that has offices in Menlo Park, had been buying up shares of Nvidia Corp. for several months, believing the Santa Clara company's chips and services will play a critical role in satisfying the massive computing demands of AI. As of March 29, Nvidia stock had shot up by nearly 90% in 2023, adding more than $300 billion to the Santa Clara company's market cap.
Despite all of the excitement, Doug Leone, who led Sequoia Capital for more than 25 years, sounded a note of optimistic caution in a recent interview on the “Invest Like The Best” podcast, comparing the current AI excitement to the Internet investment boom of the late 1990s.
“AI is real, but we are going to overestimate it in the short term,” Leone said. “We're going to invest in everything in the same way that in 1999, we invested in everything. But then Google came out of that, and Facebook came out of that."
