Source: Forbes

Artificial Intelligence(AI) is the topic crowning every conversation. It is also the technology every company is looking to integrate into its suite of products, services, or systems. Predictably, every startup is looking to launch a product or service powered by AI. And with the entire world running on the same idea, we are left to wait and see who succeeds.

The Rise of AI Startups

While AI startups began cropping up before last year, the launch of ChatGPT definitely played a role in the increase. The chatbot, which made generative AI more mainstream, brought to the world’s attention the technology which has been in the works since the 1950s.

According to Tracxn Technologies, the number of AI startups has doubled since the year 2007. Based on statistics by the company which tracks startups, by the third quarter of 2022, there were over 13300 AI startups in the United States alone.

AI startups span three sectors: hardware, software, and services. In 2021, the entire world market in the three sectors was worth $327.5 billion. By 2024, the market is predicted to be valued at $554.3 billion. This makes the industry a very lucrative business for investors.

So far, the amount of investment in AI startups has grown about 6 times since 2000. According to Financial Times, venture capital investments have risen from $10 billion in 2022 to $13 billion so far in 2023.

Source: Statista

Investors have shown that they are not afraid of putting money into AI-based companies. Led by Microsoft which invested $10 billion in ChatGPT’s creator, OpenAI, more startups are expected to raise capital in billions this year.

Notably, the reasoning behind AI investments has been very different from conventional investment practices. For instance, Mistral AI, a French startup, at just a few weeks old was able to raise $ 115 million despite lacking a product to display. This would never be the case prior to the rise of AI startups.

However, Ken Smythe, founder, and chief executive of Next Round Capital Partners, a New York venture-capital firm, says that that is the new order of business. According to Smythe, AI startups are too young to have records that determine whether or not one should make an investment.

Instead, he stated that the investment is made on the person and their track record. “[From] a diligence perspective, it’s really the track record of the person and the technology they’ve been able to develop. And then from a business perspective, can they commercialize it, and can they actually make money from it?”

Survival of the Fittest

Source: LinkedIn

Unfortunately, despite the heavy investment, 85% of AI startups will probably be out of business in three years, says Smythe. He explained that most of these companies will not survive either due to being acquired by big tech companies, which will be a win, or running out of funds.

As such, he recommends that the wisest move would be for a startup to partner with a big tech firm. “I think your early winners are the AI startups that are teaming up with the big incumbents to have capital, to have resources, to have the manpower, to have skill knowledge. Those are the big winners,” he said.

However, only so many startups can team up with tech giants. The rest have to weather the storm until they are stable enough on their own. Among the issues the companies will have to face is the regulatory concerns.

Similar to crypto, AI is a young technology that is yet to be understood. As countries and stakeholders discover the risks involved with it, there is a greater need for regulation. Therefore, for small companies, the imposition of regulations and restrictions could prove to be a challenge especially if it affects the one product the company has been perfecting.

Another looming problem is data which is the oil that runs the AI industry. More recently, companies and platforms such as Reddit that hold reserves of data have begun to limit their access and charge millions for it. In addition to computing expenses as well as keeping scientists, startups are likely to suffer a financial strain.

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