Generative AI sees global surge in investments despite sluggish VC activity in June quarter: Report

AI, especially generative AI, saw investor interest soaring in the April-June quarter after OpenAI's launch of ChatGPT in late 2022, despite global venture capital investment dropping for the sixth consecutive quarter, according to a KPMG report.

VC investors targeted AI for its potential to drive widespread disruption across industries, seeking the next home run and avoiding the fear-of-missing-out (FOMO) effect.

Global tech giants, including Microsoft, Google, Alibaba, Baidu, and Tencent, have shown significant interest during the quarter, while in China, Alibaba's Tongyi Qianwen and Baidu's Ernie bot garnering attention. Regulators globally have also increased their focus on AI, highlighted by the European Union's AI Act, which mandates reviews for generative AI systems before commercial use.

“Investment in AI and generative AI remained hot in Q2’23 as start-ups around the world looked to accentuate their AI capabilities and VC investors enhanced their focus on the AI space, seeing it as one of the few resilient areas of investment in the current market,” the Venture Pulse Q2 2023 report said.

Global venture capital investment declined from $86.2 billion (across 10,121 deals) in the first quarter of the year to $77.4 billion (across 7,783 deals) in Q2. Challenges such as increasing interest rates, persistently high inflation, domestic and geopolitical issues, and concerns about the global banking system's stability made it a tough quarter for VC investment across regions, despite the ongoing interest in Generative AI.

During the second quarter, AI garnered significant investment in the US, with Microsoft-backed AI firm Inflection raising $1.3 billion, Silicon Valley startup Anthropic securing $450 million, and OpenAI raising $300 million.

In Europe, AI and deep learning technologies stood out as a notable exception with a surge in investor interest. UK-based Quantexa secured $129 million during the second quarter, achieving unicorn status, a feat accomplished by only a few startups in the region. In the same quarter, the European Union passed the AI Act, introducing comprehensive regulations for AI usage in the region, including mandatory reviews for generative AI systems before commercial launch and a ban on real-time biometric ID systems. The UK also expressed its aspiration to become the leading hub for AI safety regulations.

“Short term, AI may be less of a hyper growth investment area than people think because it has to get to the stage where it is being commercialized and people and businesses are willing to pay for it. Long-term, the potential for AI globally is dramatic. It could really cut down on the repetitive work that people do and remove inefficiencies from all kinds of process,” Jonathan Lavender, Global Head, KPMG Private Enterprise, KPMG International, said.

The report projects that generative AI will continue to be highly sought-after for VC investment globally, driven by large corporates eager to avoid missing out on its potential as a significant multi-industry game changer.

VC investment in India increased marginally from $1.9 billion in Q1 to $2.8 billion in the second quarter. However, it remained significantly subdued compared to historical quarters, including the same quarter last year, which witnessed over $8 billion in VC investment.

“While the last 2 quarters have been muted, we expect activity to be significantly higher by the end of this calendar year. The path to profitability and positive operating cash flow continues to be critical success factor for the business owners to attract funding,” said Nitish Poddar, Partner and National Leader, Private Equity, KPMG India.