Big tech firms massively outgunned venture capitalists in 2023

  • 2023 was a year of huge deals in the AI sector, with several startups receiving massive valuations
  • The likes of Amazon, Meta, Google, etc, are aligning themselves with newcomers in the space
  • Venture capital firms have found it tricky to master this specialist sector
Ai investment

2023 has seen major tech companies like Microsoft, Google, and Amazon leading the charge in investment, particularly in generative AI startups. 

The evolution of generative AI has accelerated big tech’s post-Covid rebound, with leading companies like Amazon, Meta, Microsoft, Apple, and Alphabet all seeing their stocks climb in an explosive year for AI-related technology. 

Meta’s stock has rallied to 188% in December 2023, second only to Nvidia’s 246% increase in the S&P 500. Meanwhile, startups like Inflection, Anthropic, Mistral, and, indeed, OpenAI have rocketed far beyond the billions. Mistral, founded in May 2023, was worth $2 billion in a matter of 4 months from being founded. 

Microsoft’s $10 billion investment in OpenAI and significant funds raised by Inflection and Anthropic, in particular, have propelled AI funding to nearly triple the previous record of $11 billion set two years ago. 

These industry giants have collectively accounted for a staggering two-thirds of the $27 billion raised by emerging AI companies this year, as per data from PitchBook. It underscores Silicon Valley’s dominance over traditional tech investors in securing prime deals within the AI industry.

Amid this investment frenzy, venture capital firms have found themselves overshadowed. Rather than swooping in quickly to seal investments in fast-growing startups, big tech has proven itself best-positioned to align interests financially and strategically. 

This has amounted to a criss-cross of deals that sees competitors like Google and Amazon invest billions into the same companies (Anthropic, in this example) within the space of just weeks. 

Moreover, big tech deals are also ideally positioned to prop up these smaller AI developers with the hardware and resources they need to scale. That includes dedicating immense cloud resources as a part of deals. Again, VCs can’t match these propositions.

Nina Achadjian, a partner at Index Ventures, commented on the AI market’s consolidation, with power shifting to big tech, “Over the past year, we’ve seen the market quickly consolidate around a handful of foundation models, with large tech players coming in and pouring billions of dollars into companies like OpenAI, Cohere, Anthropic, and Mistral.” 

She emphasized the challenge for traditional venture capitalists, noting, “For traditional VCs, you had to be in early and you had to have conviction — which meant being in the know on the latest AI research and knowing which teams were spinning out of Google DeepMind, Meta and others.”

Patrick Murphy, founding partner at Tapestry VC, highlighted the competitive disparity: “Even the world’s top venture investors, with tens of billions under management, can’t compete to keep these AI companies independent and create new challengers that unseat the Big Tech incumbents. In this AI platform shift, most of the potentially one-in-a-million companies to appear so far have been captured by the Big Tech incumbents already.”

However, VC is not entirely sidelined. For example, French start-up Mistral raised around $450 million from investors like Andreessen Horowitz, General Catalyst, and Nvidia since its inception in May. Open source projects are perhaps more shielded from big tech firms focusing on securing competitive edges in their closed, proprietary software. 

Another option is focusing on companies developing applications over foundational models created by firms like OpenAI and Anthropic. 

Sarah Guo, the founder of AI-focused venture firm Conviction, explained, “There is a huge space of still-unexplored application domains for AI and a lot of the most valuable AI companies will be fundamentally new.” 

This perspective opens avenues for innovation and investment beyond class-leading models.

In any case, 2024 is sure to usher forth an exciting new array of opportunities.

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