AI: VCs rush to secure next AI deal in Big Tech territory

In December and January, several US and UK venture capitalists flocked to Paris to live for a stake in a new artificial intelligence a company that can change the way people work.

The Dust startup they courted consisted of just two people. It hasn’t been enabled yet. And he turned down a generous offer from leading investment firm Coatue Management, among other offers, three people familiar with the deal told Reuters.

Sequoia Capital won, the two people said, leading a massive $5 million “seed” fundraising round. Dust aims to create AI tools that improve the performance of white-collar workers.

The rapid advancement of Alphabet Inc and Microsoft Corp in the field of artificial intelligence and the billions of dollars they spend to gain an edge have increased competition in Silicon Valley. Startups in the field are getting offers from investors to take on their Big Tech counterparts and closing deals in days, not weeks. This is a bright spot for the slow venture capital market.

“Big tech companies with huge investments in AI are not going to easily lose their former distribution advantage,” wrote Konstantin Buhler, a partner at Sequoia Capital who led the Dust deal and is looking for productivity applications, believing that “outages are inevitable.” “

There is an investment craze for generative artificial intelligence, a subset of AI that has exploded in popularity since ChatGPT, a chatbot from startup OpenAI. Such technology can create almost any text, image, or other content on command after learning from past data input.

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“Venture capitalists think this is the new internet,” a founder of generative AI in the US told Reuters. According to PitchBook, investment in such startups has risen to $5.9 billion since the start of 2022, up from $1.5 billion in 2020. While the closure of Silicon Valley Bank could hinder debt financing, venture capitalists have said interest in funding AI startups remains high, especially for early-stage lead founders.

Samir Kaul, founding partner of Khosla Ventures, who himself was an early supporter of OpenAI, said the firm is receiving far more generative AI proposals than just six months ago.

“Now there is a herd mentality emerging among venture capitalists,” Kaul said. This means that lackluster companies will “get funded”, then “fail and jeopardize the entire promising sector.”

ChatGPT generated huge investment because “90+ percent of VCs are actually very risk averse. Until you see a real application, people will not dive into it,” he said.

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ChatGPT’s humanoid responses to any query have led observers to predict that artificial intelligence could disrupt search engine technology as well as Google’s market dominance. Two months after its launch, Microsoft updated its search competitor Bing with a chatbot based on OpenAI technology.

Investors feel an opportunity, even for a sale, if not an initial public offering; some are betting that AI startups can outpace larger competitors burdened by their size.

You.com, a search company founded in 2020 with the backing of Salesforce CEO Marc Benioff, has taken on new life with the introduction of generative artificial intelligence technology. The company told Reuters that it has attracted more attention from users and investors by processing millions of search queries a day.

Jordan Jacobs, managing partner of Radical Ventures and investor in You.com, said the upstart was “an example of the right people with the right technology and capabilities that can disrupt even the most successful business models in the world.”

Productivity tools, including writing assistants like Jasper and Regie.ai, have also raised millions of dollars in funding. These companies have won business by helping bloggers and sellers get their jobs done faster. But now Big Tech has announced updates to Google Docs and Microsoft Word that can create marketing texts.

It is not yet clear how Jasper and Regie.ai will behave when such competing tools appear. Regie.ai’s CEO previously told Reuters that his own experience and focus on sales has made him successful, while Jasper’s VP said what sets him apart is the AI ​​that creates branded content across platforms.

In this head-on competition, investors are looking for any technical advantage that could make a startup challenger stand out. Magic, a software development tool that can help write and edit code, creates its own specialized AI and user interface, for example, said Jill Chase, a partner at CapitalG who led the funding round. The company has raised $23 million to compete with Microsoft’s GitHub.

However, the biggest race is sometimes between the investors themselves, causing valuations to rise. Greyloc recently withdrew support from a founder who had 10 competing offers to lead a funding round, an unusually high number, said Saam Motamedi, a partner at the fund. venture capital solid.

Deals that could take up to six weeks in so-called Series A financing are now completed in just a few days, he said.

“Everything we have done in the field of artificial intelligence has had many conditions from most of our competitors. Entrepreneurs are lucky enough to choose who they want to work with,” Motamedi said.

“You can characterize the environment as abundant or even excessive in terms of what’s going on,” he said, “but there’s a lot of substance behind it.”