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Generative AI startups jockey for VC dollars [Featuring Redbud VC]

Updated: Aug 9, 2023


NOTE: Scale VC is now Redbud VC


With Amazon's launch of Bedrock, a suite of generative AI tools for its cloud business, the AI horse race continues to gain speed, and there's no denying the obvious: Generative AI has captivated investors' attention.


The tech giants are choosing their mounts, and a select few startups have been given launchpads. Amazon has picked Anthropic's Claude and Stability.ai's Stable Diffusion to serve as foundational models. In January, Microsoft turned heads when its plans to invest an unprecedented $10 billion in ChatGPT creator OpenAI were reported.


It's all indicative of a larger trend: Despite mounting pressure on venture capital in a difficult economic environment, money still pours into generative AI startups.


Roughly $1.7 billion was generated across 46 deals in Q1 2023, according to PitchBook data. An additional $10.68 billion worth of deals were announced in the quarter but have not completed.


"It's not a crowded market yet, but it is getting more competitive," said Lu Zhang, the founder and managing partner of VC firm Fusion Fund. During Q1, Fusion Fund invested in two generative AI startups in stealth mode that raised seed funding between $5 million and $15 million.


"The barrier for entry is still quite low," she added.


Fusion Fund, whose portfolio includes generative AI search engine You.com, has seen an 80% increase in the number of pitches for generative AI startups in just the past two months, according to Zhang.


Zhang said she sees an opportunity for investors in vertical applications, where generative AI is integrated into enterprise and commercial services. And she predicts that startups tackling privacy issues, data collection and energy consumption within generative AI broadly will become more prevalent.


Brett Calhoun, managing director and partner at Scale VC, has also seen an increase in the number of startups utilizing generative AI. Like Zhang, his primary area of interest is in vertical applications—what he dubbed the "boring sectors" like synthetic data generation, which uses computer-generated statistical models to imitate datasets that would be difficult or dangerous to collect organically.


And Ascend Venture Capital, which only reviews startups with previous venture funding, has noted an increase in companies seeking funding that it attributes partially to founders seeking to get on the generative AI bandwagon, according to general partner Dan Conner.


These investors said consulting with experts and reading the latest papers on generative AI's progress are key to understanding where the technology and market are going. When it comes to parsing through the larger volume of startups, firms are putting their faith in founders.


As Calhoun put it: "We're betting on the jockeys, not the horse."


Originally posted on Pitchbook 4/14/2023: https://pitchbook.com/news/articles/Amazon-Bedrock-generative-ai-q1-2023-vc-deals

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