Huge funding for AI

(San Francisco) Since 2022, many unprofitable tech firms have cut costs, sold themselves, or gone bankrupt. But those focused on artificial intelligence (AI) are swimming in cash.

The AI ​​boom, which began in late 2022, is the cheerful counterpoint to the gloomy lament playing out in the rest of the sector.

From April to June, $27.1 billion was invested in U.S. AI startups, nearly half of all money invested in U.S. startups, according to PitchBook. In total, U.S. startups raised $56 billion (+57% vs. 2023), the largest quarterly haul in two years.

The massive funding rounds AI companies have closed are reminiscent of 2021, when low rates and pandemic growth encouraged tech investors.

At the cost of billions

In May, CoreWeave, a cloud hosting provider for AI companies, raised $1.1 billion and then borrowed $7.5 billion, valuing it at $19 billion. Data provider Scale AI raised $1 billion, valuing it at $13.8 billion. Finally, xAI, founded by Elon Musk, raised $6 billion, valuing it at $24 billion.

According to Kyle Stanford, an analyst at PitchBook, there has been more funding, and in larger amounts: “The trough is over,” he says.

The surge has changed the outlook of some venture capitalists. Last year, IVP’s Tom Loverro predicted a “mass extinction event” and urged small tech companies to cut costs. That period is over, he said on June 26, proclaiming 2024 as the year of the “Great Awakening” and encouraging companies to “throw gasoline” on the fire of growth, especially in AI.

“The AI ​​train is leaving the station and you need to be on board,” he wrote on X.

The slowdown began in early 2022: many loss-making companies were no longer able to grow as fast as they had during the pandemic. In addition, rising interest rates pushed investors toward less risky investments. When funding dried up, small AI companies scaled back their workforces and ambitions.

AI generates everything, even dollars

Then, in late 2022, San Francisco-based OpenAI sparked another boom with its launch of ChatGPT. Excitement over generative AI, which can produce text, images and video, has fueled the creation and funding of startups.

“Sam Altman [PDG d’OpenAI] “It canceled the recession,” jokes Siqi Chen, founder of startup Runway Financial. Chen adds that his company, which makes financial software, has accelerated its development because “AI is doing the work of one and a half people.”

But while AI improves productivity, it is expensive. AI startups require huge computing and cloud storage capabilities.

Accountants and tax experts at Kruze Consulting analyzed the first financial quarter of 125 AI startups: On average, 22% of their spending went to IT – more than double the 10% spent by non-AI software companies.

“There’s a reason venture capitalists are pouring tons of money into these AI companies,” says Healy Jones, a vice president at Kruze. They’re growing faster than others, but “they need money, that’s for sure.”

Looking for the next boom

For tech investors looking for the next boom, betting on the right horse is a big win, so losing a little money on a few horses is no big deal. AI’s potential has investors in a frenzy: some prominent venture capitalists predict that the AI ​​market will surpass the smartphone, personal computer, social media and internet markets.

But with competition from tech giants including Microsoft and Amazon, AI startups could struggle to secure large funding rounds, warns PitchBook analyst Stanford. Multi-billion rounds like xAI’s are the exception, and it would be surprising to see more of them in the second half of 2024.

“It can’t go on forever,” he said.

This article was published in the New York Times.

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