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Investments in AI Startups Outpace Funding in Other Tech Categories

Summary

Investing in artificial intelligence (AI) startups with billions of dollars has become the norm in Silicon Valley, surpassing funding in all other technological categories. According to data collected by PitchBook and reported by Bloomberg, AI companies received a total of […]

Investments in AI Startups Outpace Funding in Other Tech Categories

Investing in artificial intelligence (AI) startups with billions of dollars has become the norm in Silicon Valley, surpassing funding in all other technological categories. According to data collected by PitchBook and reported by Bloomberg, AI companies received a total of $17.9 billion in funding in the third quarter, representing a 27% increase compared to the previous year. Meanwhile, the total number of deals with startups decreased by 31% globally, reaching $73 billion.

This contrasting trend highlights the divide between AI startups and the rest of the industry. The rise in interest rates and business decline after the pandemic greatly impacted venture capital funding, making AI one of the few bright spots in the world of risky investments. One of the factors contributing to this success is the impressive development of generative AI technologies, which have amazed users and investors with their ability to generate photo-realistic images and text that sound human-like in response to just a few words or queries. These technologies have attracted billions of dollars in funding for major companies.

Some venture capitalists have compared the rise of AI to the emergence of the consumer internet. “This is the moment for artificial intelligence, the moment for generative AI,” said Praveen Akkiraju from Insight Partners. Just as the internet existed for years before user interfaces made it widely accessible, AI is now advancing rapidly thanks to user-friendly programs like OpenAI’s ChatGPT, which is drawing attention.

The excitement surrounding AI has overshadowed a larger decline in the technology sector. While companies like OpenAI dominate headlines, most technology categories, including information technology, healthcare services, and consumer products, have declined compared to the same quarter the previous year, according to PitchBook data.

Even AI is not entirely immune to pressures faced by startups. The total funding in the industry is still lower than it was two years ago during the peak of the technological boom amid the pandemic. The success of AI largely relies on large deals for a few companies, including Anthropic and OpenAI.

The hype around artificial intelligence has led to a cautious approach in other branches of the industry. For example, the business software category, which was popular just a few years ago, has seen a decline. During those moments of growth, venture capitalists were excited about business software, partly due to the spectacular initial public offerings of companies like UiPath and Snowflake.

One startup that has benefited from this surge in 2021 is Kong, a company that helps manage the ways software applications communicate with each other. The company raised $100 million at a valuation of $1.4 billion in a deal led by Tiger Global Management, with participation from Goldman Sachs Group, Index Ventures, and CRV.

Kong continues to thrive, with more money coming into the company than going out in recent months, according to founder Augusto Marietti. Its business is growing thanks to the AI boom, as more AI means more data infrastructure, which drives demand for its product. However, attention is now shifting towards pure AI companies.

During the last earnings season, Marietti grew tired of hearing how every company mentioned AI after every data point. He was encouraged by Apple’s earnings report, which stood out from other companies by not mentioning AI, yet Apple’s stock price still increased.

Marietti stated that Kong integrates AI capabilities, but that does not make it an AI company. Furthermore, it does not mean it cannot continue to grow and become highly profitable. “We don’t have to have an identity crisis,” he said. “We just keep going.”

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