Tough Economy Hits AI Startups Investing Slows in the AI Tech Industry

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Charts from the Artificial Intelligence & Machine Learning Report

Venture investors are tapping the brakes on AI amid rising economic uncertainty.

What’s new: In their latest Artificial Intelligence & Machine Learning Report, market research firm PitchBook documents a sharp reduction in investment in AI startups in the first half of 2022, a time of rising inflation and interest rates.

What it says: The report delivers bad news and highlights categories that have continued to hold venture investors’ interest — and those that haven’t.

  • Funding for AI startups during the first two quarters of 2022 dropped 20.9 percent from the same period last year. It fell 27.8 percent from the first quarter — faster than information technology as a whole, which fell 21.6 percent. On the bright side, funding for the year ($48.2 billion in the first half) is on pace to beat the total for 2020 ($65.3 billion).
  • Exits in the first half of the year totaled $27 billion. 2021 saw $144.2 billion in the same period and $200 billion for the full year.
  • Over half of venture investment in AI in the second quarter — $11 billion out of the $20.2 billion total — went to applications such as drug discovery, security, and sales and marketing.
  • Startups that specialize in cloud-based AI were hit hardest. That category’s funding is on pace to tumble 87.7 percent in 2022 relative to 2021.

Future forecasts: Despite the grim numbers, the authors reject characterizing the current period as an AI winter. They expect investments to rebound from around $175 billion in 2022 to over $350 billion in 2025, driven primarily by advances in multimodal AI, general-purpose models, and synthetic data.

Behind the news: In a separate analysis, CB Insights determined that AI funding would fall by 21 percent each quarter in 2022. Similarly, it found that the losses were not uniform: AI startups in healthcare, financial technology, and retail — areas that have a solid track record — have maintained their funding levels better than other, more speculative fields.

Why it matters: When credit is harder to obtain, investors tend to back away​​ from riskier investments. Given rising interest rates, inflation, and the threat of recession, that explains the falloff in funding for startups without proven market value. Companies that focus on proven applications and markets should continue to prosper, although competition is bound to stiffen as vendors are pressed to demonstrate that their offering is superior.

We’re thinking: As we noted in previous issues of The Batch, rising interest rates and falling stock indices signal that AI developers should be ready for increased pressure to develop projects that demonstrate near-term, tangible value. We continue to believe this is a good time to invest in long-term bets on AI, as the real interest rate (adjusted for inflation) remains very low and the transformative value of AI is more financially powerful than interest rates.


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