n November, the Cambridge Dictionary named hallucinate as the word of 2023, amending the term to include:
'When an artificial intelligence (= a computer system that has some of the qualities that the human brain has, such as the ability to produce language in a way that seems human) hallucinates, it produces false information.'
The impact of AI on the online world has been monumental in the past year, so much so, that AI is starting to embody some exclusively human words, like “hallucinate”. Even those who are not particularly tech savvy have by now heard of ChatGPT, or at the very least, that something is up with AI.
In 2023, venture dollars truly flowed in heaps to this sector without much restraint, but will AI continue to stay hot on the VC radar for 2024, and what trends can we expect to see?
Let’s take a look.
The Figures
First off, let’s do a quick recap on the AI companies that raised the most money in 2023:
- OpenAI - raised $10 billion
- Anthropic AI - raised $4 billion
- Inflection AI - raised $1.3 billion
According to AltIndex, the global AI industry has more than doubled its value in just three years to a massive $240 billion, along with a quarter of a billion users worldwide. This has prompted investors to bet on AI and inject billions of dollars in the hopes of making that 10x return.
Although 2023 was mostly the year of OpenAI (ChatGPT reached 100 million users in just two months), AI funding was already hot on the investor radar in late 2022, with Stability AI, Descript, and Jasper all raising huge funding rounds.
Even teenagers were raising money for their AI startups, with AI companies raising a total of $50 billion in funding in 2023, which was actually still less than the all-time high of $78.5 billion in 2021.
What’s interesting about these figures is that despite the increased total funding amount, the number of investments was lower in 2023 than in 2022. Whereas the total number of VC investments in 2022 reached 1,101, that number went down to 842 in 2023. This means that AI companies secured more capital with fewer funding rounds.
The cumulative funding for AI startups is $333 billion. Unsurprisingly, the United States is the region that has received the most funding, with 55% going to US AI startups, and especially the ones in California, since Silicon Valley is the hub of venture capital and AI innovation.
The second highest funded region is Asia, followed closely by European companies. It’s clear by these figures that key players in these three regions are shaping the future of this industry.
What to Expect for the AI Funding Landscape in 2024
Valuations in 2023 spiked high due to companies like OpenAI and Anthropic AI closing in massive funding rounds, which shook the venture world. VCs were definitely feeling FOMO and pressure to invest in this sector, but will AI funding continue with the same upward trajectory?
According to analysts, probably not. However, it’s definitely not a complete halt either, more like a cooling down with some FOMO wearing off, which was evident in the second half of 2023 with funding rounds slowing down compared to the first half.
Let’s look at what to expect for 2024.
Regulatory hurdles
VCs expect there to be legal and regulatory hurdles that US and overseas AI startups will have to overcome, which could affect funding.
“You are seeing some startups working through some legal implications even now,” said Don Butler, managing director at Thomvest Ventures. “I think some of that will lead to a cooling off when it comes to investment, especially in early-stage AI.”
Worries about rules for AI took the spotlight towards the end of the year. The European Union agreed on preliminary regulations, setting a standard that other countries might adopt. Around the same time, news surfaced that the Federal Trade Commission is examining Microsoft's investment in OpenAI for potential antitrust law violations, indicating close scrutiny of Big Tech in the growing market.
Problematic Valuations
According to Crunchbase, many AI startups will continue pushing their valuations higher and higher, especially those building their own platforms and models. This, however, can be problematic for VCs.
While tech giants like Advanced Micro Devices, Google, and Nvidia, can afford to invest in startups at high valuations, the current market dynamics might make some venture capitalists hesitant, especially as they increasingly prioritize financially stable companies over those burning through cash.
Niko Bonatsos, Managing Director at General Catalyst, acknowledges that some AI startups may have secured funding at inflated valuations, leading to potential investor regret. However, he highlights the ongoing evolution of AI, anticipating that future algorithms will be more efficient, requiring less computational power and benefiting from increased open-source resources, ultimately reducing the cost of starting an AI company.
The challenge for venture capitalists lies in resisting the temptation of pursuing overly optimistic valuations in the AI sector. As the new year unfolds, it remains uncertain how startups in this costly industry will navigate these challenges, posing questions that even AI might struggle to answer.
High Costs of Training AI Models
The cost of training advanced models, along with infrastructure and hardware shortages, is becoming a major concern. Lawrence Lundy, Partner at Lunar Ventures, predicts that in 2024, it will be clear that training cutting-edge models is too expensive.
"The most powerful models can cost tens of millions to train. Big players like Microsoft and Google are investing $10 billion in building the infrastructure to support their customers."
Oleksandr Puchka, Technical Director at Zibra AI, agrees:
"There's a divide between companies and countries that have enough GPUs and those that don't. This is similar to what happened during the Blockchain mining boom, causing GPU prices to soar."
There are certainly no sure winners just yet, but Big Tech has the resources to keep experimenting, while others don’t, unless they get that VC cash to keep up with data, computing power, and recruiting top talent.
Predictions Straight From the VC’s Mouth
Here’s what some investors from top VC firms predict about AI for 2024 - you have it straight from the horse’s mouth!
“In 2024, we’re going to see a shift in phases from AI toys (hype-first products that capitalize on the latest tech) to native AI products (products that utilize AI to solve long standing human needs in innovative ways).” —Jacob Andreou, partner, Greylock
“The rise of AI has created a huge demand for computing power and storage space, not to mention energy. In 2024, I expect we’ll see more innovation taking place in data centers, with opportunities for companies that can improve networking efficiency, access alternative sources of power, and find better methods for cooling the immense heat generated by GPUs.” —Erin Price-Wright, partner, Index Ventures
“With the emerging learnings in core neural net architectures that led to the transformer and dominance by OpenAI, it is likely that their imminent release of GPT5 will be surpassed in specific performance benchmarks by a new dark horse market entrant, on the backs of more efficient architectures, improved multimodal capabilities, better contextual understanding of the world, and enhanced transfer learning. These new models will be built on emerging research in spatial networks, graph structures, and combinations of various NNs that will lead to more efficient, versatile, and powerful capabilities.” —Ethan Batraski, partner, Venrock
Other Things That Could Happen This Year
Forbes released an article last year with 10 AI predictions for 2024, and three of them are worth mentioning here.
Stability AI Not So Stable
The first one is that Stability AI will shut down. A shocker - but apparently the fledgling startup, which was once flying high, has been a slow-motion train wreck for most of 2023.
Their top talent has left, Coatue and Lightspeed, the prestigious VC firms which led their $100 million financing round in 2022, have stepped off the company’s board, and the company failed to raise additional funds in 2023.
Sounds like a disaster.
OpenAI and Microsoft Fall Out
The second interesting prediction is that Microsoft and OpenAI’s relationship may start to crack.
Microsoft and OpenAI have a close partnership, with Microsoft investing over $10 billion in OpenAI. OpenAI's models are used in key Microsoft products like Bing, GitHub Copilot, and Office 365 Copilot. When OpenAI CEO Sam Altman was unexpectedly fired, Microsoft CEO Satya Nadella played a crucial role in getting him reinstated.
However, despite their alliance, Microsoft and OpenAI have distinct goals and long-term visions for AI. The partnership has been beneficial, but it's more of a convenient arrangement than a perfect alignment. Signs of potential issues have already started to emerge.
OpenAI is aggressively expanding its enterprise business, bringing it into direct competition with Microsoft for customers. Microsoft, in turn, has reasons to diversify its AI model suppliers, as seen in its partnership with OpenAI rival Cohere and investments in smaller language models like Phi-2 due to the high costs of running OpenAI's large models.
Crypto Makes a Comeback
The third and final one is that the AI hype might do a full circle back to crypto. No surprises here. Crypto operates in cycles, and even though it might not be in the spotlight now, another significant bull run is likely on the horizon—similar to what happened in 2021, 2017, and 2013.
Many influential figures in the tech and investment world, currently enthusiastic about AI, were heavily involved in crypto during the 2021-2022 bull market. If crypto prices rise again next year, some of them may shift their focus back to crypto, just as they followed the trend to AI this year.
Promising AI Startups to Keep an Eye On
Business Insider recently asked VCs to name the most promising startups. Of course, these are just their personal opinions (and investments), but nonetheless worth noting.
These were their top 7 recommendations.
1. Adept - a machine learning research lab
Recommended by: Niki Pezeshki, Felicis
Total funding: $415 million
2. Aily Labs - customized AI tools for companies
Recommended by: Scott Barclay, Insight Partners
Total funding: €19 million
3. AlphaSense - a business-data-intelligence platform
Recommended by: James Luo, CapitalG
Total funding: $623 million
4. Captions - an intelligent video editor
Recommended by: Ev Randle, Kleiner Perkins
Total funding: $40 million
5. CentML - optimizes machine learning models
Recommended by: Rares Crisan, GGV Capital
Total funding: $3.5 million
6. Character.AI - AI-powered chat
Recommended by: Ev Randle, Kleiner Perkins
Total funding: $193 million
7. Durable - AI for business services
Recommended by: Josh Coyne, Kleiner Perkins
Total funding: $6.25 million
Top AI Angel Investors in the US
These are the top 11 AI angel investors in the US at the moment.
1. Elad Gil
Number of AI investments: 26
2. Nat Friedman
Number of AI investments: 22
3. Kevin Mahaffey
Number AI investments: 21
4. Scott Belsky
Number of AI investments: 19
5. Lachy Groom
Number of AI investments: 17
6. Jason Calacanis
Number of AI investments: 17
7. Anthony Goldbloom
Number of AI investments: 16
8. Wei Guo
Number of AI investments: 16
9. Mark Cuban
Number of AI investments: 16
10. Naval Ravikant
Number of AI investments: 15
11. Scott Banister
Number of AI investments: 15
Top AI VC Firms in 2024
Below is a list of the most active venture capital firms investing in AI.
- Sequoia Capital
- Lightspeed Venture Partners
- Index Ventures
- Khosla Ventures
- Alven Capital
- Local Globe
- Balderton Capital
- New Enterprise Associates
- a16z
- Seedcamp
- Kindred Capital
- Creandum
- Microsoft
- SV Angel
- Google Ventures
- Lux Capital
- Zetta Venture Partners
- Wing Venture Capital
- Intel Capital
AI Angel Investor Databases
Below is a list of the 5 best databases with information on AI angel investors.
Interested in the full research paper?
Join to receive Venture Capital research, guides, models, career tips, and many other great insights delivered straight to your inbox.
