ChatGPT: Billion-Dollar Investments in AI Startups Without a Business Plan
May 9, 2023
Former Google AI researchers, Niki Parmar and Ashish Vaswani, fielded investor interest for their AI startup before even having a formal name, customers or business plan. The duo were among the co-authors of a seminal 2017 paper on generative AI, which contributed to the boom of the field.
Shortly after starting their own company, they managed to raise funds at a $50 million valuation for their fledgling venture, now named Essential AI, according to people familiar with the matter.
Despite Silicon Valley’s venture-capital ecosystem remaining stagnant, investors have been pouring funds into companies like Essential that specialize in generative AI systems capable of creating humanlike conversation, imagery, and computer code. These companies are often new and unproven.
Research firm PitchBook analysts predict that venture investment in generative AI companies will easily surpass last year’s $4.5 billion level. Microsoft’s $10 billion investment in January into OpenAI, the startup responsible for the popular ChatGPT bot, is partly responsible for this surge in investment. In comparison, the investment in this field was only $408 million in 2018, the year OpenAI launched the initial version of the language model powering ChatGPT.
Entrepreneurs and investors are optimistic that generative AI will revolutionize various business activities, including movie production, customer service, and grocery delivery. According to PitchBook, the market for AI applications in enterprise technology is expected to grow to $98 billion in 2026 from nearly $43 billion this year. This highlights the increasing demand for such AI-powered solutions and the potential for significant growth in the industry.
Investors Pour Money into AI Startups Despite Unclear Profitability Paths
Investors are pouring money into AI startups even when it’s unclear how these companies will generate profits, particularly given the high computational power required to train AI services. The sudden influx of capital is also driving many AI researchers to start their own companies, adding to the competition.
While some experts predict that great products and companies will emerge from this AI boom, others caution that many companies with half-baked ideas will not succeed. The AI industry experienced a surge in investment after the launch of OpenAI’s ChatGPT, which quickly became one of the fastest-growing consumer apps in tech history.
Other startups, such as Anthropic, are also building large language models that can generate original text with the help of massive algorithms. Anthropic is expecting to raise up to $5 billion in the next two years to further develop its ChatGPT rival called Claude.
Despite the overall decline in U.S. venture funding, events related to AI are still experiencing a boom. Venture capitalists are hosting events and bar nights in Hayes Valley, San Francisco, a growing AI hub, to attract talent. NFX, a venture firm backing several generative AI startups, has a red-walled speakeasy in its Hayes Valley offices and an event space with a dance floor.
Prominent venture capitalist Ron Conway held a two-day event for his fund’s portfolio companies, many of which incorporate AI. The event featured former President Barack Obama and OpenAI’s CEO Sam Altman and attendees such as musician and entrepreneur will.i.am.
Large deals are being closed at a rapid pace in the AI industry. Voice AI startup Eleven Labs raised funds from Andreessen Horowitz at a valuation of around $100 million, while wearable device maker Humane raised $100 million from investors, including OpenAI CEO Sam Altman.
AI Startups See Massive Investments, Intense Competition as Researchers Launch New Ventures
Investors are pouring massive amounts of money into AI startups, leading to intense competition and driving many AI researchers to start their own companies. Some startups, such as Eleven Labs and Humane, have recently raised significant amounts of funding.
Meanwhile, Character.AI, co-founded by two former Google employees, raised $150 million, and Cohere raised $250 million, valuing the company at $2 billion. The competition is so fierce that some investors are backing well-respected researchers without a clear business plan.
This has led to some startups being valued at absurd levels, according to Jordan Jacobs, co-founder of AI-focused fund Radical Ventures. Essential, founded by two former AI startup founders, recently raised funds from VC Thrive Capital to create a service that helps companies use their data with multiple language models.
Adept, the previous company founded by Noam Shazeer and Ashish Vaswani, is working on developing AI tools that can complete tasks with human prompts. In March, Adept announced raising $350 million from investors such as General Catalyst and Spark Capital.
Investors says: Intense competition and high valuations put pressure on AI startups to deliver results
Investors are worried that the intense competition and high valuations of AI startups will lead to a faltering of these companies. Some startups are raising seed rounds with valuations of tens of millions of dollars or more, while others are raising back-to-back rounds of funding.
Lavender, an AI-powered software sales startup, raised money as part of its initial seed round and then raised more as part of its Series A funding round. LangChain, an open-sourced library for software developer tools with no revenue, recently closed a $10 million round at a $50 million valuation. Sequoia Capital later invested in the company and quadrupled its valuation to around $200 million.
The surge of investments in AI startups is creating intense competition in the field, leading to high valuations and pressure to deliver results. Investors are pouring in massive amounts of money despite unclear profitability paths, indicating strong optimism in the potential of generative AI to revolutionize various business activities.
While some experts predict that great products and companies will emerge from this AI boom, others caution that many companies with half-baked ideas will not succeed. Regardless, the demand for AI-powered solutions is increasing, highlighting the potential for significant growth in the industry.