Big Tech surpasses venture capital firms in AI investments

Microsoft, Google, and Amazon have made a series of successful deals this year, and the large expenditures, which exploded after the launch of OpenAI’s ChatGPT in November 2022, highlight how the largest groups from Silicon Valley are pushing out traditional tech investors for the biggest deals in the industry, writes FT.

The rise of generative artificial intelligence has also attracted top investors from Silicon Valley, but VCs have been outpaced as they have been forced to slow their spending while adjusting to higher interest rates and the decline in the value of their portfolio companies.

– Over the past year, we have seen the market rapidly consolidate around a few foundational models, with major tech players coming in and investing billions of dollars in companies like OpenAI, Cohere, Anthropic, and Mistral – said Nina Achadjian, a partner at the American venture firm Index Ventures.

A series of deals, such as Microsoft’s $10 billion investment in OpenAI, as well as the billions of dollars that San Francisco-based Anthropic has raised from Google and Amazon, have helped increase total spending on AI companies to nearly three times the previous record of $11 billion set two years ago.

Venture capital investments in technology reached record levels in 2021, as investors took advantage of exceptionally low interest rates to raise and deploy vast amounts across a range of industries, particularly those most disrupted by Covid-19.

Nothing without partners

Building and training generative AI tools is an intensive process that requires enormous computing power and money. As a result, startups prefer partnerships with large tech companies that can provide cloud infrastructure and access to the most powerful chips, as well as funding.

This has quickly raised the valuations of private startups, making it difficult for VCs to bet on companies that are technology leaders. For example, OpenAI is now valued at $86 billion, three times the valuation the company received earlier this year.

– Even the largest venture investors in the world, with tens of billions under management, cannot compete to maintain the independence of these AI companies and create new challengers that displace current Big Tech companies – said Patrick Murphy, founding partner at the VC firm Tapestry.

This means that a good portion of the AI companies that have emerged so far are already captured by large tech companies.

However, VCs are not absent from the market. For instance, Thrive Capital, a company founded by Josh Kushner based in New York, has already supported OpenAI earlier this year and is currently a leading investor in the sale of OpenAI employee shares. Mistral, based in Paris, has raised about $500 million from investors, including venture capital firms Andreessen Horowitz and General Catalyst, and chipmaker Nvidia.

Some VCs are looking to invest in companies that build applications based on so-called ‘foundational models’ developed by OpenAI and Anthropic, much like how applications began to develop on mobile devices in the years following the introduction of smartphones.

– There is this myth that only foundational model companies matter. However, there is a huge space still unexplored for AI application domains, and many of the most valuable AI companies will be fundamentally new – said Sarah Guo, founder of the AI-focused venture capital firm Conviction.