Artificial Intelligence craze gets funding from tech giants, distorting traditional venture capital | Wilnesh News

The IPO cycle has entered a dormant period of nearly three years, and venture capitalists are in a difficult situation.

The private markets are dotted with artificial intelligence startups with generous valuations, including some described as generational company. But venture capital firms in need of an exit won’t find relief from artificial intelligence anytime soon.

That’s because, unlike previous tech booms, venture capital is not at the center of this one. Instead, the largest companies in the industry— Microsoft, Amazon, letter and NVIDIA — has been pouring billions of dollars into capital-intensive companies like OpenAI, Anthropic, Scale AI and CoreWeave.

With some of the world’s most well-capitalized companies pouring money to fund the generative AI boom, the usual pressure to go public doesn’t apply. Even if they do, this new crop of startups is far from showing the profitability metrics public investors need to see before taking the plunge.

Tech giants have more than just money. They also offer tangible benefits like cloud credits and business partnerships, and offer incentives that venture capital firms can’t match.

“The AI ​​startups we interviewed have not had any problems raising money at strong valuations,” S&P Global Market Intelligence analyst Melissa Incera told CNBC. “Many still report that , there is too much unsolicited investor interest at the moment.”

Taken together, venture capital is experiencing severe market distortions with no clear end in sight. According to a report on August 29, the value of U.S. venture capital exits this year is expected to reach $98 billion, a decrease of 86% from 2021 Report Data from PitchBook shows that venture capital-backed IPOs are expected to reach their lowest level since 2016. Emerging startups building apps.

PitchBook data shows that as of 2024, investors, including strategic investors, have poured $26.8 billion into 498 generative AI deals. This trend continues from 2023, when generative AI companies raised $25.9 billion for the year, an increase of more than 200% from 2022.

Artificial intelligence’s share of total fundraising jumped from 12% in 2023 to 27% so far this year, according to Forge Global, which tracks private market deals. Data shows that the average number of financing rounds for artificial intelligence companies this year increased by 140% compared with last year, while the growth of non-artificial intelligence companies was only 10%.

Chip Hazard, co-founder of early-stage company Flybridge Capital Partners, said investment capital is moving “upwards” and “long-lasting companies will be built at the application layer.”

This all takes time to develop. Meanwhile, new investors continue to suffer from the market shift that began in early 2022, when soaring inflation led the Federal Reserve to raise interest rates, forcing investors out of risky assets and toward more conservative investments that ultimately provided yields.

Tech stocks have since rebounded, driven by other large stocks such as Nvidia, whose chips are used to train most artificial intelligence models, and Microsoft. Yuan and Amazon. The Nasdaq hit an all-time high in July, followed by some selling. But initial public offerings and expensive acquisitions have been rare, leaving venture capital firms with minimal returns for their limited partners.

“It will be difficult for managers to raise additional capital without providing returns to limited partners, especially since more liquid, lower-risk investments are now attractive due to high interest rates,” PitchBook wrote in an August report. force yield.

Cerebras is a pure artificial intelligence company that seems to be about to go public. The company was founded in 2016 and has received support from a number of traditional venture capital firms including Benchmark and Foundation Capital. As a semiconductor company, Cerebras has never reached the lofty valuations commanded by developers of artificial intelligence models and other infrastructure players, Up to $4 billion In 2021, before the market tilts downward.

Cerebras said in late July that it had Confidential submission Its IPO filing with the SEC. The company has not yet filed a public prospectus. A spokesman for Cerebras declined to comment.

When it comes to basic model companies, the astronomical valuations they quickly achieve put them in a very “different league” outside of the venture capital world, said Jeremiah Owyang, a partner at Blitzscaling Ventures.

“Given the market conditions, it is very challenging for venture capital firms to commit to an exit right now,” Owyang said. That’s for their company to ultimately succeed.

January, Menlo disclosed The company is raising a so-called special purpose vehicle (SPV) — called Menlo Inflection AI Partners — as part of Anthropic’s $750 million financing, a deal that values ​​the company at more than $18 billion. Amazon has been a major backer of Anthropic since it launched in 2021, trying to keep up with Microsoft. The funding round will value the creators of ChatGPT at more than $100 billion.

Menlo previously invested in Anthropic in 2023 at a valuation of approximately $4.1 billion. In order to invest more money at higher prices, Menlo had to branch out from its main business areas. US$1.35 billion fund Closed last year. When raising an SPV, venture capital firms typically require limited partners to put money into separate funds dedicated to specific investments, rather than the company’s portfolio. Menlo seeks $500 million from the SPV.

In July, Cohere, a competitor startup that focuses on generating artificial intelligence for enterprises, announced that it had received US$500 million in financing from investors including AMD, salesperson, Oracle Nvidia values ​​the company at $5.5 billion, more than double last year’s valuation.

Cohere confirmed to CNBC that part of the financing, as well as part of the previous financing, was done through an SPV. Montreal-based Inovia organized the latest SPV and Shopping CEO Tobias Lutke is one of the participants.

Representatives for Menlo and Inovia did not respond to requests for comment.

Some investment banks have also set up special purpose vehicles (SPVs) to allow multiple investors to pool funds into popular companies. JPMorgan Chase told CNBC that clients “already have access to several leading AI investments” through the bank’s J.P. Morgan Private Ventures arm.

Still, an IPO will have to happen at some point for investors to reap the rewards, as the regulatory environment makes it nearly impossible for big tech companies to engineer major acquisitions. Companies like Microsoft, Alphabet, Amazon and Nvidia are very patient with their investments – they have a combined $280 billion in cash and marketable securities on their balance sheets.

Another potential avenue for liquidity is the secondary market, which involves selling shares to another investor.

Elon Musk’s SpaceX reportedly values ​​itself at Over $200 billion A recent employee tender offer has enabled investors to acquire shares through secondary transactions. For some investors in xAI, this may be the end result. billion dollars.

But SpaceX is an exception. In most cases, secondary transactions are seen as a way for founders and early investors to cash out a portion of their shares in a highly valuable company, rather than as a way for venture capital to generate returns. To do this, they need an initial public offering.

Michael Harris, global head of capital markets at the New York Stock Exchange, recently told CNBC that the NYSE is in conversations with “a number of companies focused on artificial intelligence,” adding, “As the industry evolves, we expect this channel to continue Go down and build.

This year, a handful of artificial intelligence companies have gone public. Aster LaboratoryThe company sells data center connections to cloud and artificial intelligence infrastructure companies and listed on Nasdaq in March. The company is valued at about $6.5 billion, down from $9.5 billion after its first day of trading.

Tempus Artificial IntelligenceA Google-backed medical diagnostics company went public in June. The stock has risen about 50% since its listing, valuing the company at $8.6 billion.

However, the IPO floodgates never opened, and the high-profile artificial intelligence company isn’t even talking about going public.

S&P’s Incera said: “Barring a dramatic shift in market sentiment, it’s hard for me to understand why these AI startups, which have been able to grow privately on such favorable terms, would put themselves in the public spotlight,” she said. , going public “will only increase the pressure to show returns or reduce spending, which is not a feasible requirement for many at this stage of the maturity curve.”

Most venture capitalists are optimistic about the potential of generative AI to eventually generate huge returns at the application layer. This has happened in every other famous tech cycle. Amazon, Google and Facebook All web applications are built on the Internet infrastructure. Uber, Airbnb and break are some of the many valuable applications built on the smartphone platform.

Gartner analyst John-David Lovelock, a 35-year IT industry veteran, sees huge opportunities for generative AI in the enterprise. However, he said that by 2024, only 1% of the trillions of dollars spent on software will come from corporate spending on generative artificial intelligence products.

“There’s money invested in some GenAI tools and a handful of existing applications,” Lovelock said. “However, large-scale rollout of GenAI across a broad catalog of enterprise software products has yet to occur.”

watch: How Big Tech Companies Quietly Acquire Artificial Intelligence Startups