Generative AI deals dropped 29% in the third quarter from the previous quarter with total deals valued at $6.1 billion, according to Pitchbook.
The deal value is largely thanks to Amazon’s blockbuster agreement with language model provider Anthropic, inked last month and worth up to $4 billion.
Big Tech has dominated the generative AI space, and may be contributing to the slowdown by “scaring away investors and startups,” Pete Flint, general partner at NFX, told PitchBook.
“The retention and monetization are just not there,” he added.
With Microsoft inking a multiyear deal reportedly worth $13 billion with OpenAI—and Apple acquiring more than 30 AI startups over the last decade followed by Google with 21 acquisitions, according to CB Insights’ data—Big Tech has deep pockets to stay in the long game.
This year however, even Big Tech saw a big slowdown in dealmaking activities, with only Apple and Google publicly disclosing AI acquisitions this year, wrote CB Insights.
It may sound like investors are losing appetite for AI, but it’s not over yet.
Opportunities in enterprise and arbitrage AI
“We still see a lot of interest but other than Open AI, valuations are all over the map,” said R “Ray” Wang, principal analyst and founder of Constellation Research.
Wang said that in San Francisco, consumer-based AI startups will mostly lose funding, but investors are doubling down on companies focused on enterprise software-based AI.
Sierra Ventures is one such investor that sees great opportunity in enterprise AI.
“GenAI has the capability to drastically impact revenue and cost for enterprises that adopt it aggressively,” said managing director Tim Guleri. It can help companies bring products to market faster and can improve customer conversions, both of which can greatly impact total sales, he added.
But the appeal is on the cost side, where “opportunities are endless.” Guleri said enterprise Generative AI can help lower cost for back office functions like document and legal processing, while improving customer support and engineering processes.
In New York, Wang sees opportunity in arbitrage AI, where there’s twice as much funding than in enterprise AI. Arbitrage AI relates to financial systems where traders seek pricing inefficiencies to boost profits, whether it be in commodities or price dips in the market.
But Guleri is not convinced. “Arbitrage AI is not a magic pill, as its being made out to be,” he said. “It might be better at spotting short-term market patterns than humans, but figuring out when to get in and out of market is near impossible without deep human intuition.”
Long-term commitment
AI investments are forecasted to reach $200 billion globally by 2025, according to Goldman Sachs.
Bloomberg Intelligence pins the number at $1.3 trillion over the next 10 years from a market size of just $40 billion in 2022.
“GenAI’s impact has been overstated in the short-term and understated in the long term,” said Guleri. “It will need time to mature, get accurate and safe.” He said enterprises should be ready for a long-term commitment, with a planning horizon of 5 to 7 years.