Photo from Harvard Business Review
Ho Chi Minh city, 23 May 2023 8:am
Prior to having customers, a solid business plan, or even an official name, Niki Parmar and Ashish Vaswani, former AI researchers at Google, were already receiving significant interest from investors who were eager to fund the next major innovation in artificial intelligence.
At Google, individuals named Ms. Parmar and Mr. Vaswani were part of a group of co-authors who played a significant role in a groundbreaking paper published in 2017. This paper was instrumental in facilitating the subsequent growth of generative AI. Recently, shortly after venturing out on their own, they successfully secured funding for their new startup, which is now known as Essential AI. According to insiders familiar with the company, the funds raised valued Essential AI at approximately $50 million.
While a significant portion of Silicon Valley's venture capital landscape continues to experience a slowdown, investors have been actively investing in companies such as Essential that focus on generative AI systems capable of generating humanlike conversation, imagery, and computer code. Numerous newly established and untested companies within this domain have been receiving financial support.
According to analysts at research firm PitchBook, venture investment in generative AI companies is anticipated to surpass last year's figure of $4.5 billion by a substantial margin. This growth can be attributed, in part, to Microsoft's significant investment of $10 billion in OpenAI in January. OpenAI is the company responsible for the widely acclaimed ChatGPT bot. In 2018, the year when OpenAI introduced the initial version of the language model that powers ChatGPT, investments in generative AI companies amounted to $408 million in comparison.
Entrepreneurs and investors are banking on generative AI to revolutionize business activities, including movie production, customer service, and grocery delivery. PitchBook estimates the enterprise technology market for such AI applications to reach $98 billion in 2026, up from nearly $43 billion this year.
Similar to the recent surge in startup investing, investors are showing interest in AI startups even without a clear path to profitability. This is particularly noteworthy considering the substantial computational costs, which can reach tens of millions of dollars annually, associated with training AI services. The influx of capital is also prompting AI researchers, some lacking management or operational expertise, to launch their own ventures, intensifying competition in the field.
According to Matt Turck, an AI-focused investor at New York-based venture capital firm FirstMark, the current situation represents a significant turning point where promising products and companies will emerge. However, he warns that, similar to previous hype cycles, not all ventures will succeed. The sudden surge of numerous companies with incomplete ideas is unsustainable, likening it to a gold rush scenario.
The AI boom gained momentum following the introduction of ChatGPT by OpenAI in late November, which quickly became one of the most rapidly growing consumer apps in the history of technology. OpenAI is among several well-funded startups focused on developing extensive algorithms known as large language models, capable of generating original text.
In recent months, Google made a significant investment of over $300 million in Anthropic, a direct competitor of OpenAI. Anthropic plans to secure up to $5 billion in funding over the next two years to further develop its large language model, which serves as the foundation for its ChatGPT competitor named Claude, as stated in an investor presentation
While overall U.S. venture funding experienced a sharp 55% decline to $37 billion in the first quarter, AI-related events continue to exude an atmosphere reminiscent of prosperous times. Esteemed venture capitalist Ron Conway organized a two-day celebration in March for companies in his portfolio supported by SV Angel, many of which incorporate AI in their operations. The event featured notable speakers such as former President Barack Obama and OpenAI CEO Sam Altman. Attendees, including musician and entrepreneur will.i.am, socialized with founders while enjoying refreshments, as reported by individuals present at the gathering.
Venture capitalists are actively seeking talent by organizing bar nights and events in the trendy Hayes Valley neighborhood of San Francisco, known as Cerebral Valley for its burgeoning AI presence. NFX, a venture firm supporting multiple generative AI startups, has transformed its Hayes Valley offices into an alluring space, featuring a red-walled speakeasy and a garage converted into an event venue with a dance floor. Substantial deals are being struck at a rapid pace, with voice AI startup Eleven Labs recently securing funding from Andreessen Horowitz at a valuation of approximately $100 million.
Additionally, Humane, a startup founded by former Apple executives, raised $100 million from investors, including Mr. Altman, to develop AI-powered wearable devices, as reported by The Wall Street Journal in March.
Character.AI, an AI startup established by two former Google employees less than two years ago, recently secured $150 million in funding, resulting in a valuation of $1 billion, as confirmed by the company. Meanwhile, Cohere, a generative AI startup based in Toronto, raised $250 million in a recent funding round, potentially valuing the company at $2 billion, according to sources familiar with the matter. The Financial Times previously reported on Cohere's fundraising activities.
Noam Shazeer, one of the founders of Character.AI, was a co-author of the 2017 Google paper alongside Mr. Vaswani and Ms. Parmer. This seminal paper introduced a more efficient and precise method for AI systems to analyze text blocks. Similarly, Aidan Gomez, co-founder of Cohere, was also a co-author of the same paper.
Scott Beechuk, a partner at Norwest Venture Partners, expressed that the current competition in the AI space is intense, describing it as "vicious." He noted the high level of interest from venture capitalists, with everyone striving to invest in these companies.
The competition is fierce to the point that venture firms are willing to support esteemed researchers even without a formal business plan, as stated by multiple investors who have evaluated such startups. Consequently, many of these ventures have successfully secured funding.
According to Jordan Jacobs, the managing partner and co-founder of Radical Ventures, a Toronto-based fund exclusively dedicated to AI investments, renowned researchers can launch startups with remarkably high valuations.
After departing from a previous AI startup they co-founded, Ms. Parmar and Mr. Vaswani secured investments for Essential in January from VC Thrive Capital and other investors, as confirmed by insiders. While Essential's founders are still refining their strategy, sources familiar with their plans indicate that they are currently focused on developing a service that enables companies to leverage their own data alongside multiple language models.
Adept, the prior venture of Ms. Parmar and Mr. Vaswani, is working on tool development for human-triggered task completion. In March, Adept announced raising $350 million from investors such as General Catalyst and Spark Capital.
The heightened enthusiasm for AI deals has raised concerns among investors about the potential challenges faced by startups under the pressure to deliver. Startups seeking seed funding are aiming for valuations in the range of tens of millions of dollars or even higher. Additionally, certain companies are securing successive rounds of funding in quick succession.
Mr. Beechuk, an investor, mentioned investing in Lavender, an AI-powered software sales startup, during its Series A funding round. He expressed that executing a similar deal in the present would be challenging due to the intense competition prevailing in the market.
LangChain, a revenue-less open-source library catering to software developer tools, concluded a $10 million funding round at a valuation of $50 million, as per insiders. Shortly after, venture capital firm Sequoia Capital stepped in with additional funding, increasing the valuation fourfold to approximately $200 million, according to the same sources.