Venture Capital's Race for AI Supremacy in 2023 Explained
The Coming AI Revolution - Breakdown of Coatue's report
We’ve seen a lot of high-octane hype trends in recent years. Off the top of my head I’ve personally witnessed FinTech, Web3, Self-driving Cars, EVs, ESG, Virtual reality, Quantum Computing, Cloud Computing and others, and very few of them have realistically panned out very well. Very often they take literally decades longer to even materialize often coming late and far less magical (or useful) than they once appeared.
So will Generative A.I. be any different? Will the same thing happen here? That is the big question I have. It’s literally the job of VCs to make this stuff look good.
In 2023 we’ve seen a pretty intense gold-rush by both Venture Capital and BigTech firms investing in Generative A.I. startups.painted a picture of how aggressive companies like Microsoft, Google and Nvidia have been in their funding of Generative A.I. and also to benefit their own moats in A.I. chips, the Cloud and software services. I expect in 2024, Amazon and Apple to follow suit.
For Generative A.I. startups, 2023 has been a boon and their total funding keeps rising with momentum all its own:
Image credit: Charlie Guo - Read it.
I was actually pretty surprised how aggressive Nvidia was and how well diversified in where it is funding the next era of A.I. companies.
In fact Nvidia’s CEO says artificial intelligence will be “fairly competitive” with humans in as few as five years. Well that certainly sounds better than creating an AGI that can replace median humans.
How to Visualize BigTech Investing in Generative AI?
Image credit: Charlie Guo - Read it.
Another really notable figure that stands out is the former CEO of Google, Eric Schmidt.
Eric has invested in dozens of AI startups, namely big in Mistral and Inflection, among others.
Compute Intensive LLM Infrastructure Funding marks 2023
The average size of Generative A.I. Series A, B and C rounds have also been a lot larger in 2023, given the compute required to fund these foundational model infrastructure startups.
According to a Databricks report:
The number of companies using SaaS LLM APIs (used to access services like ChatGPT) has grown 1310% between the end of November 2022 and the beginning of May 2023.
Why has 2023 been So Pivotal for VC Funding in Generative A.I.?
It’s all those foundational LLM companies like OpenAI, Anthropic, Inflection, Cohere and their peers.
In late September, Amazon pledged up to $4 Billion for Anthropic. Cloud leaders need to keep up in A.I. to keep their growth up. While Microsoft failed entirely to take search advertising marketshare from Google, Azure is growing faster than AWS in recent months likely due to Microsoft’s aggressive investment in OpenAI, and early-access to GPT-4. The stakes are very high.
With the firing of OpenAI’s principled board, OpenAI is not the same entity. Stability AI which struggled to get funding and had to turn to Intel, will likely be sold. OpenAI will need even more funding to determine its mission to invent AGI. The pressure of A.I. startups to do even bigger rounds is now snowballing heading to the end of 2023.
Advent of LLM Startups
Foundational LLM startups from OpenAI to Mistral point to a new future and VCs have hitched a ride.
Everyone from Inflection (with Billionaires) to Imbue (with Dell) to 01.AI are making up ground. Indeed it’s not just VCs, it’s the Billionaire class, BigTech and even chip firms. According to data from Crunchbase:
Large language models
Description: Large language model developer for enterprises
Year founded: 2019
Last valuation: $2.2B
Total funding raised: $435M
Funding stage: Series C
Lead investors: Index Ventures, Tiger Global Management, Inovia Capital
Description: Large language model developer
Headquarters: Beijing, China
Year founded: 2019
Last valuation: $1.6B
Total funding raised: $342M
Funding stage: Late
Lead investors: Qiming Venture Partners, Meituan, Alibaba Cloud, Guangxi Tencent Venture Capital, Ant Group
Description: Large language model company
Headquarters: Tel Aviv, Israel
Year founded: 2017
Last valuation: $1.4B
Total funding raised: $274M
Funding stage: Series C
Lead investors: Pitango VC, Walden Catalyst, Ahren Innovation Capital, Samsung Next, B2venture, SCB 10X
Light Years Beyond
Description: Generative AI tool
Year founded: 2023
Last valuation: $1.2B
Total funding raised: $280M
Funding stage: Acquired
Lead investors: Wang Huiwen, Source Code Capital
Description: AI research lab
Headquarters: San Francisco
Year founded: 2021
Last valuation: $1B
Total funding raised: $232M
Funding stage: Series B
Lead investors: Astera Institute, Dell
Light Years Beyond has already been acquired and Stability AI is likely to be. With Microsoft, Amazon and Google making big moves, Google likely investing greatly in Character.AI, quasi-consolidation is also already occurring in the hot LLM space. In many ways it’s likely to be too hot to be real, if previous hype trends are any indication for how these things work.
Leadership is a Problem in such a Hyped Space
As controversial as Sam Altman has become, he’s not alone. Coatue Management called for Chief Executive Officer Emad Mostaque to step down in a letter to management last month, some of the people said. I could go on about the allegation concerning him, but it’s really not so much my style (there were a number of hit pieces in Forbes for example).
While I don’t think Sam or Emad are the best people to be leading these things, they are the footsoldiers of very rich people and their interests. VC money, Billionaires and BigTech want control, not just influence.
Stability AI is a good example of what happens when you raise too much money without much evidence to support that you are uniquely qualified for said funding round. Stability AI back in August, 2023 started the craze after all, ChatGPT came later. Back when Generative A.I. images were a thing, now we are already on to video.
Everything is still very immature and nascent in the space of LLMs, but the winners will be big. China in 2024 will also offer up quite a few LLM startups in their bid to catch up with the U.S. China is suffering from a lack of A.I. chips and funding for their Generative A.I. startups.
Coatue aims to:
Turning big ideas into world-shaping companies.
And their pressuring for the CEO to step down and for Stability AI to exit are well justified.
In fact on November 16th, 2023 Coatue put out a very interesting report titled: AI: The Coming Revolution that I wanted to take a look at with my premium readers.
To access my deep dives and the majority of my best work, consider becoming a paid subscriber and supporting the publication and all my work on emerging tech.
A Gold Rush Chasing AGI
2023 has been a feast for AI investors and Generative A.I. has been a real moonshot by Silicon Valley. How it plays out in 2024 and the years ahead is something I’ll definately be watching. Suffice to say though that moonshots don’t tend to end well, the majority of the time.
Model Makers Dominated Gen AI Funding in 2023
71% Model makers
Major VC players
Read this on the web to see it clearly.
Major Events in 2023 in Gen AI Funding
Microsoft invests $10bn in ChatGPT maker OpenAI – 23 January 2023
Adept AI secures $350m in Series B round – 14 March 2023
Anthropic secures $450m in Series C round – 23 May 2023
Mistral secures $113m in Seed round - 13 June 2023
Inflection AI secures $1.3bn in venture funding – 29 June 2023
Databricks raises $500m – 14 September 2023
Amazon invests up to $4 Billion in Claude maker Anthropic - 25 September 2023
Google commits up to $2 Billion in Claude maker Anthropic - 13 October 2023
We’ll be Watching
All this being said, GenZ appears to be the early adopters of Generative A.I. tools.
70% of Gen Z report using the technology and 52% of them trust the technology to help them make informed decisions.
Countries that are more youthful, like India, show higher adoption rates.
73% of the Indian population surveyed is using generative AI.
Just as the internet sparked a knowledge revolution and mobile created the on-demand economy, many analysts believe Generative AI unlocks another layer of capabilities in the Cloud.
Tools, agents, personal assistants and the automation of tasks in our lives might transform Capitalism with a more powerful convergence of reasoning and interactive A.I. Coatue of course, is betting on it.
If you have the time, you can read the report for yourself:
You can also access the report on Google Drive if you prefer.
But let me summarize it for you:
In the grand scope of things, Coatue’s summary is far more impactful than the State of AI slides by another VC firm in my opinion.