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According to venture investor Accel, generative AI startups receive 40% of all venture capital funding flowing into cloud companies.
In its latest annual report European Landscape ReportLooking at key cloud and artificial intelligence trends, Accel said venture capital investment in cloud startups in the United States, Europe and Israel is expected to rise to $79.2 billion this year, with artificial intelligence driving much of the recovery.
Venture capital investment in the cloud industry has increased by 27% annually, which is the first year of growth in three years. The report found that cloud startups in Europe, Israel and the United States raised $62.5 billion in 2023.
According to Accel, funding for cloud companies is up 65% from the $47.9 billion raised four years ago.
Previously, OpenAI, the Microsoft-backed company behind the popular generative artificial intelligence chatbot ChatGPT, raised $6.6 billion in a massive funding round earlier this month, valuing the startup Reaching $157 billion.
AI is eating software
Much of the growth in funding in the cloud space is driven by excitement about artificial intelligence.
Philippe Botteri, a partner at Accel, told CNBC this week that “artificial intelligence is sucking the air out of the room” when it comes to the cloud. “This is seen in both the public and private markets.”
As of September 30, the Euroscape index, a selection of U.S., European and Israeli listed cloud companies curated by Accel, was up 19% from the same period last year.
That dwarfs the Nasdaq’s 38% gain this year and is down 39% from the Euroscape index’s 2021 peak.
Beyond artificial intelligence, the cloud industry has also been going through a tough time, with enterprise software budgets being squeezed by macroeconomic and geopolitical risks.
“There’s a lot of uncertainty,” Botteri said, adding that businesses are increasingly asking questions about geopolitical tensions and macroeconomic factors that influence software spending priorities.
No company in the Accel Euroscape index has grown revenue by more than 40% this year, while 23 companies achieved this feat in 2021.
“IT budgets are shifting toward artificial intelligence,” Botteri noted. “They’re still growing slightly, but they’re up a few percentage points year over year.”
“Part of it is the budget for genAI, building new applications, testing these new technologies, so the rest is less budget,” the venture capitalist added.
Focus on the base model
According to Accel’s Euroscape report, the top six generative AI companies in the United States, Europe and Israel each account for approximately two-thirds of the funding raised by all genAI startups.
OpenAI raised $18.9 billion in 2023-24, accounting for the largest share of venture capital flows to U.S. genAI companies.
“When you look at OpenAI and the speed at which revenue has exceeded $3 billion, you see that this is one of the fastest software companies ever,” Botteri said.
Anthropic has raised $7.8 billion in funding, ranking second among U.S. genAI startups, while Elon Musk’s xAI ranks third.
In Europe, the largest amounts of financing went to the UK’s Wayve, France’s Mistral and Germany’s Aleph Alpha.
Globally, companies building the so-called foundational models that power most of today’s generative AI tools account for two-thirds of total generative AI company funding, Accel said.
Big Tech’s Artificial Intelligence Spending
The United States leads the world in total regional generative AI investment.
Accel said that of the $56 billion in total global inflows from genAI companies in 2023-24, about 80% of the cash will go to U.S. companies, noting Amazon, Microsoft, Google and Yuan Each company invests an average of US$30 billion to US$60 billion in artificial intelligence every year, which is staggering.
Accel said artificial intelligence “giants” such as OpenAI, Anthropic and xAI spend billions of dollars on the technology, while smaller challengers such as Cohere, H and Mistral invest tens to hundreds of millions of dollars annually.
Dev Ittycheria, chief executive of database company MongoDB, noted that the most powerful artificial intelligence models are likely to be concentrated in the hands of a few players who can attract the necessary capital investment in data centers and chips to train and run the systems.
“Access to capital is going to profoundly impact the performance of these models,” Ittycheria said in an interview on CNBC’s “Squawk Box” on Tuesday. He added: “My bet is that over time you’re not going to have that With many model providers, it may be reduced to one or two.”
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