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Investments in GenAI getting weaker financial data shows

There are signs that the enthusiasm for investing in generative AI is getting weaker. “Generative AI continues to elicit considerable investment from VCs and tech giants, but there are signs that enthusiasm is waning”, financial data firm PitchBook says in a report. 

“Deal count declined in the most recent quarter and deal value was on a similar track before Amazon’s mammoth commitment of up to $4 billion to Anthropic last month.”

PitchBook says investors acknowledge the technology’s promise but say they are reassessing the utility of generative AI applications and threats posed by larger players.

“It seems unthinkable, but momentum for generative AI appears to be slowing after captivating VCs and the broader public, leading to a surge in VC funding.”

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“While investment remains high by historic standards, excitement appears to be waning in the sector as large tech companies make waves and investors realize that many generative AI applications may not be ready for prime time.”

PitchBook data shows the number of generative AI deals fell to 101 rounds in Q3, a 29% decline from Q2. Deal value was also on a downward track, but ended higher at $6.1 billion thanks to the blockbuster deal for up to $4 billion that Amazon inked with Anthropic, a provider of large language models, last month.

“Momentum is definitely waning as the market comes back to earth,” said Bryan Offutt, a partner at Index Ventures. 

He noted that while the technology is impressive, it’s still not reliable enough for most use cases, leading to a loss of investor enthusiasm.

“We are living in the messy middle of AI,” Offutt says.

PitchBook says generative AI remains hot relative to the broader VC slowdown that has hit other verticals. 

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AI21 Labs, an Israel-based large language model startup specializing in text-based generation, raised a $155 million Series C funding in August. 

Databricks, the developer of a data analytics platform with its own Lakehouse generative AI program, recently raised more than $500 million from investors including Nvidia and T. Rowe Price. 

Corti, creator of a generative AI copilot for use in healthcare, raised a $60 million Series B funding in late September.

“But while VCs keep searching for the next OpenAI, many are now acknowledging that early bets may not be panning out. Pete Flint, a general partner at NFX, said there’s a realization now among founders and investors that some early companies were interesting experiments, but not great businesses”, PitchBook reports.

“The retention and monetization are just not there,” Flint said.

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He added that Big Tech is looming large over the generative AI space, contributing to the slowdown by potentially scaring away startups and investors. 

“It’s clear that established digital incumbents and challengers are not asleep at the wheel,” he said.

PitchBook says that still, some VCs are hopeful that there are more lucrative developments down the pipeline. The company quotes Tim Guleri, managing director of Sierra Ventures, who cautions other VCs to play the long game with generative AI. 

“The impact we need to be looking through is not through weeks or months, but quarters and years,” he said. “I wouldn’t even say we’re in the first inning, we’re still in the first couple of pitches.”

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