Gen AI funding set to break record in 2024, VC investments poised to surpass USD 22.7 bn: S&P Global

The surge in funding has been fueled by billion-dollar mega-rounds from major players such as OpenAI LLC and Anthropic PBC, underscoring the growing enthusiasm and confidence in GenAI's transformative potential.

Venture capital investment in generative AI (GenAI) startups is on pace to surpass the record levels set in 2023, with funding in the first three quarters of 2024 already exceeding USD 20 billion.

Significant funding deals have propelled this growth, including X.AI Corp.'s USD 6 billion round in the second quarter and OpenAI's USD 6.6 billion secured in the third quarter.

Anthropic, having already raised USD 8.8 billion, is reportedly in talks for another fundraising round. The second and third quarters have witnessed the highest quarterly funding totals since the first quarter of 2021, when Microsoft Corp. invested USD 10 billion in OpenAI.

The frontier foundation model space has become increasingly competitive, with new entrants such as Elon Musk's X.AI and Ilya Sutskever's Safe Superintelligence Inc., which raised USD 1 billion.

In the US and Europe, at least six frontier foundation models are now available, with more anticipated. While experienced entrepreneurs attract strong investor interest, the cost of developing a foundation model remains high, and the competition is intense.

Established tech giants like Alphabet Inc. and Meta Platforms Inc. have significant financial resources, posing a challenge to smaller startups.

Despite substantial cash burn, investors are optimistic due to the rapid pace of revenue growth in the GenAI sector.

According to S&P Global referring to a Stripe Inc. report cited by the Financial Times, GenAI companies are reaching USD 30 million in revenue faster than companies in previous tech shifts, such as software as a service.

Smaller model providers are finding it difficult to compete with the latest flagship models and are focusing on improving open-source model performance through new tooling.

The intense competition is leading some companies to shift strategies or exit the race. Inflection AI Inc. and Aleph Alpha GmbH have repurposed their businesses to focus on helping enterprises adopt GenAI. Meanwhile, Anthropic is reportedly seeking additional funding, potentially raising its valuation to USD 40 billion.

Arun Bharath, chief investment officer at Bel Air Investment Advisors, said, ""This is a game of survival, if you are not early to build the moat around you, you are going to be left behind."

Investment in GenAI applications, where startups integrate third-party foundation models with their data to create new use cases, has already surpassed last year's levels.

These companies are targeting markets such as search, customer service, and software development, areas where GenAI can provide significant efficiencies. For example, Perplexity AI Inc. and Ai Search Inc. are reportedly experiencing rapid revenue growth, suggesting that Google's long-standing dominance in search could face disruption.

Startups are also specializing in vertical markets like legal and healthcare, where GenAI tools can streamline processes. Appella AI, a stealth startup, recently shifted its focus from broad customer engagement tools to fashion e-commerce, aiming to deliver hyper-personalized shopping experiences. (ANI)