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A new zone of AI booms, even amid the tech gloom

A new zone of AI booms, even amid the tech gloom

A new zone of AI booms, even amid the tech gloom

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Five weeks ago, OpenAI, an artificial intelligence lab in San Francisco, launched ChatGPT, a chatbot that answers questions in clear, concise prose. The AI-powered tool immediately caused a stir, with more than a million people using it to create everything from poetry to high school term papers to Queen song rewrites.

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Now OpenAI is in the midst of another gold rush.

The lab is in talks to strike a deal that would value it at around $29 billion, more than double its valuation in 2021, two people with knowledge of the talks said. The potential deal — where OpenAI would sell existing shares of the company in a so-called takeover bid — could total $300 million, depending on how many employees agree to sell their shares. they stated. The company is also in talks with Microsoft — which invested $1 billion in it in 2019 — for additional funds, two people said.

The clamor around OpenAI shows that even in the most dismal tech downturn of a generation, Silicon Valley’s deal-making machine continues to work. After a humbling year that included massive layoffs and cuts, tech investors — a naturally optimistic bunch — are eager to jump on a hot trend.

No field has created more excitement than generative artificial intelligence, the term referring to technology capable of generating text, images, sounds and other media in response to short prompts. Investors, pundits and journalists have been talking about artificial intelligence for years, but the new wave – the result of more than a decade of research – represents a more powerful and mature breed of AI.

This type of AI promises to reinvent everything from online search engines like Google to photo and graphics editors like Photoshop to digital assistants like Alexa and Siri. Ultimately, it could provide a new way to interact with almost any software, allowing people to chat with computers and other devices as if they were chatting with another person.

This has accelerated the closing of deals around generative AI ventures. Jasper, a generative AI startup founded in 2021, raised $125 million in October, valuing $1.5 billion. Stability AI, an image-generating company founded in 2020, raised $101 million in the same month, valuing $1 billion. Smaller generative AI companies, including Character.AI, Replika and You.com, have also been inundated with investor interest.

In 2022, investors injected at least $1.37 billion into generative AI companies through 78 deals, nearly as much as they invested in the previous five years combined, according to data from PitchBook, which tracks financial activity in the industry.

OpenAI’s $29 billion valuation was previously reported by The Wall Street Journal. Venture capital firms Thrive Capital and Founders Fund could buy shares in the tender offer, two people said. Because OpenAI started out as a not-for-profit company, it’s difficult to determine its precise valuation.

OpenAI, Thrive Capital and Founders Fund did not provide comment on the proposed investment.

Companies have been developing generative AI for years, including tech giants like Google and Meta as well as ambitious start-ups like OpenAI. But the technology only caught the public eye last spring, when OpenAI unveiled a system called DALL-E that allows people to generate photorealistic images simply by describing what they wanted to see.

It inspired entrepreneurs to dive into new ideas and investors to make sweeping proclamations of disruption. Their excitement soared to new heights in December following the release of ChatGPT’s OpenAI, with fans taking to the tech to generate love letters and business plans.

“This is the new kind of ‘mobile’ paradigm shift we’ve all been waiting for,” said Niko Bonatsos, an investor at venture capital firm General Catalyst. “Maybe bigger too.”

Investors at Sequoia Capital wrote that generative AI has “the potential to generate trillions of dollars in economic value.” And Lonne Jaffe, an investor at Insight Partners, said: “There’s definitely an element to it that feels like the early launch of the internet.”

Google, Meta and other tech giants have been reluctant to release generative technologies to the general public because these systems often produce toxic content, including misinformation, hate speech and biased images against women and people. of color. But newer, smaller companies like OpenAI — less concerned with protecting an established corporate brand — have been more willing to take the technology public.

The techniques needed to create generative AI are widely known and freely available in academic research papers and open source software. Google and OpenAI have an advantage because they have access to deep pockets and raw computing power, which are the building blocks of technology.

Still, many top researchers at Google, OpenAI, and other top AI labs have struck out on their own in recent months to found new start-ups in the field. These start-ups have received some of the biggest fundraising rounds, with the excitement around ChatGPT and DALL-E spurring venture capitalists to invest in even more start-ups.

More than 450 start-ups are now working on generative AI, according to a count from a venture capital firm. And the frenzy was compounded by investors’ eagerness to find the next big thing in a bleak environment.

Michael Dempsey, an investor at venture capital firm Compound, said the tech downturn — which last year included a crypto crash, underperforming stocks and layoffs at many companies — has created a lull among investors. .

Then, “everyone got excited about AI,” he said. “People need something to say to their investors or to themselves, honestly, that there’s something next that will get them excited.”

Some fear that the hype around generative AI has preempted reality. The technology has raised thorny ethical questions about how generative AI can affect copyrights and whether companies need permission to use the data that drives their algorithms. Others believe that big tech companies like Google will quickly crush start-ups and that some of the new companies have little competitive advantage.

“There are a lot of teams that don’t have any AI skills posing as AI companies,” Dempsey said.

These worries haven’t dampened the wave of excitement, especially after the arrival of Stability AI in October.

The startup had helped fund an open-source software project that quickly built image-generating technology that worked much like DALL-E. The difference was that while OpenAI had only shared DALL-E with a small number of testers, the open source version of Stability AI – Stable Diffusion – could be used by anyone. People were quick to use the tool to create photorealistic images of everything from a medieval knight crying in the rain to Disneyland painted by Van Gogh.

In the excitement that followed, Eugenia Kuyda, founder and CEO of chat bot startup Replika, said in an interview that she had been contacted by “every venture capitalist in Silicon Valley.” , more than 30 companies. She responded to their calls but waived further funding because her business, founded in 2014, is profitable.

“I feel like the person who arrived at the airport a week earlier for a flight – and now the flight is boarding,” she said.

Character.AI, another chat bot company, and You.com, which adds chat technology to its Internet search engine, have also attracted interest from venture capitalists, the companies said.

Sharif Shameem, an entrepreneur who built a searchable database for images created by Stable Diffusion in August called Lexica, said his tool quickly reached one million users – a sign he should grow from his start-up. up existing to focus on Lexica. Within weeks, he raised $5 million in funding for the project.

Mr. Shameem compared the moment around generative AI to the advent of the iPhone and mobile apps. “It feels like one of those rare opportunities,” he said.

Mr. Jaffe of Insight Ventures said his firm has since encouraged most of its portfolio companies to consider integrating generative AI technology into their offerings. “It’s hard to think of a company that couldn’t use it in some way,” he said.

Radical Ventures, a venture capital firm in Toronto, one of the world’s centers for AI research, was created five years ago specifically to invest in this type of technology. It recently launched a new $550 million fund dedicated to AI, with more than half of its investments in generative AI companies. Now those bets are even better.

“For four and a half years people thought we were crazy,” said Jordan Jacobs, partner at Radical. “Now for the past six months they thought we were geniuses.”

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