Global VCs are scrambling to invest in interactive AI products

In December and January, several venture capitalists from the US and Britain flocked to Paris to vie for shares in a new artificial intelligence company that could transform the way people work.

Their favorite startup, Dust, consisted of just two people. It had not yet been included. 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, leading a significant $5 million fundraising round, two of the people said. Dust aims to build AI tools that improve the productivity of white-collar workers.

Alphabet Inc and Microsoft Corp’s rapid push into AI and the billions of dollars they are spending to gain an edge have intensified competition in Silicon Valley. In the space, startups field pitches from investors to take on their Big Tech peers and close deals in days instead of weeks. That’s a bright spot for an otherwise sluggish venture capital market.

“Big tech companies investing heavily in AI won’t let their existing distribution advantage go away easily,” writes Constantin Buhler, a partner at Sequoia Capital who led the Dust deal and is looking into productivity applications. believing that “disruption is inevitable”. “

There is an investment frenzy surrounding generative artificial intelligence, a subset of artificial intelligence that has grown in popularity with ChatGPT, OpenAI’s new chatbot. Such technology can generate almost any text, image or other content on command after being trained on past data input.

“VCs think this is the new Internet,” one of the founders of artificial intelligence in the United States told Reuters.

Investments in such startups have reached $5.9 billion since the start of 2022, up from $1.5 billion in 2020, according to data from PitchBook. While the closing of Silicon Valley Bank may hinder debt financing, venture capitalists say interest in financing AI startups remains high, especially for top early-stage founders.

Samir Kaul, a founding partner at Khosla Ventures, himself an early backer of OpenAI, says the company is receiving more generative AI proposals than it was just six months ago.

“Now you get this herd mentality” among venture capitalists, Kaul said. It means that lackluster companies will “get funded” and then “fail and give a black eye to an entire industry that has a lot of promise.”

ChatGPT invested heavily because “ninety percent or more of venture capitalists are actually very risky. Until you see an actual application, people don’t really dive in,” he said.

ChatGPT’s human-like responses to any query led observers to predict that AI could disrupt search engine technology along with Google’s market dominance. Two months after its launch, Microsoft updated its search rival Bing with a chatbot powered by OpenAI technology.

Investors feel the possibility of even a sale, if not an initial public offering. some are betting that AI startups can outperform larger rivals, overwhelmed by their size.

You.com, a search engine company founded in 2020 and backed by Salesforce CEO Marc Benioff, has found new life with the introduction of generative AI technology. It has attracted more attention from users and investors, with millions of searches per day, the company told Reuters.

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

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

How Jasper and Regie.ai will fare after the launch of such competing tools remains unclear. Regie.ai’s CEO previously told Reuters that its in-house experience and sales focus positioned it well, while Jasper’s vice president said its AI, which creates branded content across platforms, was a standout. to him

With such competition, investors are looking for any technical advantage that can set an upstart competitor apart. Magic, a software engineering tool that can help write and edit code, is building its own specialized AI and user interface, for example, said Jill Chase, a partner at CapitalG who led its funding round. The company raised $23 million in an effort to compete with Microsoft-owned GitHub.

However, sometimes the biggest race is between the very investors that drive valuations. Greylock recently backed a founder who had 10 competing proposals to lead a funding round, an unusually high number, said Saam Mothamedi, a partner at the venture capital firm.

Deals that can take up to six weeks for so-called Series A financing now close in just a few days, he said.

“Everything we’ve done at AI has had a lot of term sheets from a lot of our competitors. “Entrepreneurs are lucky to choose who they want to work with,” Mothamedi said.

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