Generative AI boom sparks investment spree

A flurry of dealmaking is taking place as investors look to stake their claim in AI’s newest frontier

Generative AI, or GenAI, the term for artificial intelligence systems able to generate text, images, video, audio and other media in response to prompts, is making waves within the global technology sector and beyond. The launch of ChatGPT in November 2022 placed this burgeoning segment of AI firmly on the public radar. The technology’s potential to automate and streamline tasks that would otherwise require human intervention has produced countless headlines, some optimistic and some bleak.

While many questions about the technology remain unanswered, the economic potential of GenAI is attracting significant attention. Valued at US$40 billion in 2022, Bloomberg Intelligence projects that the global market may grow to US$1.3 trillion by 2032.

High-growth GenAI startups have also been capturing investor attention. A flurry of venture capital and M&A transactions have been announced since ChatGPT’s launch, as dealmakers seek out competing startups that look set to shake up the industry.

Microsoft’s big bet

Microsoft kicked off 2023 with a landmark investment in ChatGPT developer OpenAI, which will see the US software giant acquire a 34.5% stake in the company for a reported consideration of US$10 billion, based on an enterprise value of US$29 billion. This follows Microsoft’s initial US$1 billion investment round in the AI research company held in July 2019, as the software group looks to integrate OpenAI’s technology across its business operations.

Microsoft’s strategic investment in OpenAI—widely viewed as a market leader in the GenAI space—highlights the value sought in large language models. This technology builds on earlier forms of machine learning through its capability for “zero-shot” learning, which is the ability to carry out new tasks without previous training. Open AI’s newest form of its software, GPT-4, offers users a unique conversational experience, answering follow-up questions and even turning down requests deemed inappropriate.

In April, a group of investors including Sequoia Capital, Andreessen Horowitz, Thrive and K2 Global poured a further US$300 million into OpenAI, underscoring the faith investors are placing in GenAI’s tremendous growth potential.

VCs race to fund the next big thing

The investments in OpenAI sparked a buying spree among venture capital investors looking to be a part of a credible competitor to ChatGPT. While many VCs have cooled on investments in other tech innovations such as cryptocurrency and blockchain—and with VC funding in general down 53% year over year in Q1 2023—GenAI is a bright spot.

Rapid innovation, or in some cases pivoting, by startups has generated a stream of GenAI competitors coming to market, as VC firms are eagerly pursuing these opportunities. In 2022 alone, investment in the sector reached US$2.1 billion—a 425% increase compared to 2020, according to PitchBook data.

GenAI-focused startups are also being acquired at very early stages. Microsoft and Nvidia, for example, announced their US$1.3 billion fundraising for one-year-old startup Inflection AI in June. This represents a huge bet on Inflection’s GenAI chatbot, Pi, which has been described as a sympathetic sounding board, rather than a traditional information provider.

French AI startup Mistral, meanwhile, was just four weeks old when it raised US$113 million in seed funding led by California-based VC firm Lightspeed Venture Partners. The deal, also announced in June, is Europe’s largest-ever seed round.

Data providers buy into GenAI

Corporate buyers are also eager to get in on the action. In June, US-based software unicorn Databricks announced its purchase of OpenAI competitor MosaicML for US$1.3 billion, a purchase price that jumped six times since its last price-round valuation of US$222 million. This price tag illustrates not only the intense demand for GenAI tech, but also the value of the talent needed to power it, as the deal values each of MosaicML’s 62 employees at US$21 million.

Using an open-source model, the partnership between Databricks and MosaicML aims to make GenAI more accessible to organizations, enabling them to build models using their own data. It is seen as an important step in the “democratization” of GenAI as businesses come to grips with what Databricks CEO Ali Ghodsi has called “the biggest computing revolution of our time.”

Also in June, multimedia news giant Thomson Reuters agreed to acquire ten-year-old Casetext, a legal AI company providing automated workflows and tools for legal teams, for US$650 million. CoCounsel, Casetext’s flagship product, uses OpenAI’s GPT-4 large language model to carry out everyday legal tasks including document review and deposition preparation.

Geopolitical concerns also spur GenAI race 

A global GenAI buying spree includes Chinese internet firms that are reportedly making US$1 billion worth of orders for A800 processors—a type of chip needed to develop large language AI models—from US chipmaker Nvidia this year over fears that the Biden administration would impose additional export restrictions.

The US took steps last year to limit access by Chinese firms to AI-relevant semiconductors, imposing export controls that limited Chinese firms to purchasing a weakened version of Nvidia’s coveted A100 processors. President Biden announced further restrictions this month on US investment in China’s quantum computing, advanced chips and AI sectors. The new measure will take effect next year.

Into the unknown

GenAI’s dealmaking frenzy marks a bright spot in a challenging global technology sector and VC financing market, with share price volatility and financial market uncertainty inhibiting investment over the past year. Private equity and VC funds will be looking to deploy their substantial dry powder to attractive deals despite ongoing market turbulence, and GenAI appears to be one area that piques the interest of certain VC funds. 

As investors navigate the changing global financial and political climate, while seeking to capitalize on this promising new technology, GenAI will remain an area to watch.

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