AI Predictions for 2024

Plus other key observations for Founders, investors, and you!

AI venture funding is closing out 2023 with a bang: Q4 rebounds over $11 billion! Below, we make predictions for 2024 about industry-specific AI, dissect VC funding of AI for 2023, and perform some critical analysis for investors and Founders alike. Read on, subscribe, comment, repost, and like the article!

Executive Summary

Venture funding for AI in 2023 bottomed out after the Silicon Valley Bank failure, but has rebounded to levels similar to 2022. Total 2023 AI venture funding was $50.2 billion (according to a preliminary number from Crunchbase, also the source for other statistics here).

• The big AI companies soaked up a large portion of available capital, with OpenAI doing a $10 billion deal with Microsoft and Anthropic doing over $6 billion in 2023.

• For the pre-seed round, 971 companies reported raising $679 million in 2023 with an average size of $700,000.

• The seed round had over 1,300 companies raise a total of $3.5 billion in 2023 with an average size of $2.65 million.

• The average size of an A-round of financing in AI has increased to $13.2 million in 2023, a high water mark, up from $11.4 million in 2022. Compare this to $9.3 million back in 2020. There is a big gap between seed and the A-round that Founders and early stage VCs/Angels should be aware of.

• We predict industry-specific AI will become more popular in 2024. More predictions below!

AI Funding Rebounded in Q4

When Silicon Valley Bank failed the weekend before March 13, 2023, I predicted that venture funding would slow down, and it did. AI venture funding dropped 38% from Q1 to Q2 in 2023. Funding has rebounded in Q4 (not shown on the chart yet), both in terms of dollars and number of deals on a preliminary basis: $11.3 billion and 782 deals (source: Crunchbase), so almost back to Q2 2022 levels, but nowhere near the top in 2021. While much of the focus is on generative AI, there are companies doing almost anything you can imagine in AI.

Figure: AI Funding Dropped after SVB Failure, but Rebounded in Q4

Big AI Deals

The big difference has been how the big companies have captured the lion’s share of the funding. Open AI alone took 20% of all AI venture funding in 2023 with their $10 billion Microsoft deal. Anthropic raised over $6 billion. I think it is interesting to look at the deals being done by corporate VCs, which have a different mindset than VC firms that have many limited partners focused primarily on investment returns. Lower valuations and higher interest rates have slowed down the VC fund firms, but apparently not the corporate VCs.

Figure: Average AI Deal Size in 2023 Is 34% Higher than 2022

Overall Venture Funding for Q4 Accelerates Past Q1

In fact, preliminary numbers show overall Venture funding (all industries) for Q4 2023 near $93 billion, which would be the top quarter for 2023, and close to a record quarter for anytime other than the 2020-2021 venture boom.

Figure: Global Venture Financing Drops in 2023 Until a $94 Billion Q4 Rebound

Corporate Venture Funding

Let’s examine a few big corporate VC departments and what they did in 2023. Numerous publications have reported that VC investing in AI from corporates has outpaced the VC fund firms in 2023. I will show a few key deals and trends for a few companies, so this list is clearly not exhaustive.

Microsoft

Of course we have the $10 billion OpenAI injection. They were also a lead investor in Inflection AI as part of a $1.3 billion round. They are busy building co-pilots for their software.

NVIDIA

NVIDIA was one of the most active dealmakers in 2023 in the AI space, with 35 deals including Inflection AI and Mistral. They have started to focus on industry specific AI deals (one of my predictions for 2024), including energy and healthcare.

Capital One Ventures

I am using Capital One Ventures as an example of how broad the scope of corporate VCs is. In 2023, they did everything from a $25 million post IPO debt deal with Inspirato to some small pre-seed rounds, for example $1.3 million to Devnaut. We believe Corporate VCs will remain a force across the capital stack in 2024.

Key Overall AI VC Funding Observations

Here are my key observations from 2023:

• Watch out for the elephants. The concentration of funding into the larger, general LLM providers will make it hard to compete as a general LLM provider without your own huge funding.

• You can get stepped on. For example, when Open AI made research augmented generation standard in Chat GPT, hundreds of companies focused on that as their business model hit a brick wall.

• Mind the gap. The gap after the seed round and before the A-round has become critical. The average seed round was just over $2.5 million in 2023. If you burn through that before growing your annual recognized revenue (ARR) or do something else to justify a 5 times larger A-round (on average $12.5 million last year), funding may be very hard to come by and you might need to lay people off, bootstrap your way back up, sell out, or go bankrupt.

• Fill the gap. There were thousands of “new” AI startups in 2023 judging by seed and pre-seed rounds, looking to fill every gap apparent in the AI landscape. Many are concentrated in the same areas and do not even know it yet.

Key AI Predictions for 2024

Here are my key predictions for AI for 2024:

• More scrutiny on AI. And not in a good way. The rose-colored glasses will come off and companies using AI as well as VC investors in AI will be taking a harder look at the use cases and potential ROI offered by different AI companies.

• Regulation talk for AI. As workers worry about their jobs, especially in a US presidential election year, there will be more talk of regulation of AI in the US and around the world. Whether it happens or is meaningful is a different story. Here’s a reminder that the regulators will look for ways to enforce existing laws. There is no “free pass” for AI.

• Focus on industry-specific AI. I think AI companies focused on specific industries will thrive in 2023. You cannot just hand your employees Chat GPT and expect them to become more productive without specific use cases, data, governance, managing the risks (including confidential information and customer data), complying with applicable rules and laws, and keeping an eye on cybersecurity.

• Corporate VCs ramp up. I believe corporate VCs are only getting started and will continue to be big players, investing in companies they believe align with their businesses. Companies that do not have corporate VC arms will think about adding. Those that have them will focus more on AI and the data required for AI.

Copyright © 2024 by Alec Crawford         

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