Big Tech is spending more than VC firms on AI startups
Big tech companies such as Microsoft, Google, and Amazon have surpassed traditional Silicon Valley investors in their investments in generative AI startups. In 2023, these established giants accounted for two-thirds of the $27 billion raised by emerging AI companies, according to data from private market researchers PitchBook.
The significant outlay, which surged after the introduction of OpenAI’s ChatGPT in November 2022, highlights the dominance of the largest Silicon Valley groups in the industry’s biggest deals. Generative AI, which enables the production of human-like video, text, image, and audio in seconds, has also attracted top Silicon Valley investors. However, venture capital firms have struggled to keep up due to adjusting to higher interest rates and falling valuations for their portfolio companies.
Large tech players, including Microsoft, Google, and Amazon, have poured billions of dollars into companies like OpenAI, Cohere, Anthropic, and Mistral, consolidating the market around a handful of foundation models. VC firms needed to possess early knowledge of the latest AI research and be aware of the teams spinning out of companies like Google DeepMind and Meta to secure their place in the sector.
Companies such as Microsoft have committed billions of dollars to AI startups like OpenAI and Inflection, aiming to maintain a competitive edge over their rivals. Building and training generative AI tools requires significant computing power and financial resources, leading startups to prefer partnering with Big Tech companies for cloud infrastructure, access to powerful chips, and funding opportunities.
The influx of investment from Big Tech has driven up the valuations of private AI startups, making it harder for VCs to invest in companies at the forefront of the technology. OpenAI, for example, is seeking an $86 billion valuation in its employee stock sale, nearly tripling its earlier valuation this year.
While VCs are not absent from the market, their influence has diminished as Big Tech incumbents capture the most promising AI companies, limiting competition and the creation of new challengers. Although some VCs are investing in companies that develop applications on top of foundation models, there is still ample space for fundamentally new and valuable AI companies to emerge.
Thrive Capital, led by Josh Kushner, has been an active investor in OpenAI, participating in employee stock sales and backing the company throughout the downturn in venture spending in 2023. Paris-based Mistral has raised approximately $500 million from investors including Andreessen Horowitz and General Catalyst.
As the largest tech companies continue to pour billions into AI startups, venture capitalists are grappling with the challenge of finding opportunities to invest in the booming sector. With the rise of generative AI and the consolidation of the market around a few key players, the dominance of Big Tech appears unassailable.
In conclusion, Big Tech companies, including Microsoft, Google, and Amazon, have outspent venture capital groups in investing in AI startups. The emergence of generative AI has attracted significant attention and funding, propelling the valuations of startups and making it difficult for VCs to compete. As the market consolidates and the technology advances, the dominance of Big Tech in AI continues to grow.
