As summer blazes on and the dust settles on the first two quarters of the year, now seems a good moment to reflect on the global venture capital trends impacting the artificial intelligence market. A one-line summary of the data would be: investor interest in AI is holding steady, but still shy of peak velocity.
The Big Picture
According to KPMG, VC-backed companies raised $105.7 billion across 6,512 deals during the first half of the year ($53 billion in Q1 and $52.7 billion in Q2). The figure is down somewhat on the record-breaking H1 2018 total of $119.1 billion, but it remains a strong increase on the same periods in 2016 and 2017 and a good showing overall.
Appetite for AI remains strong among VC firms globally. America continues to motor ahead, with the value of AI-related deals standing at $7.6 billion in H1 (nearly $3 billion more than over the same period in 2018). A relative newcomer and a real region to watch however is South East Asia, which has seen $3.4 billion in incoming VC investment, including almost a tripling of investment from China alone. A sign perhaps that as fears of a trade war between America and China rumble on, investors are looking for opportunities in more stable geopolitical regions.
Areas of Interest
With the largest number of AI-backed startups, healthcare as a sector has proven a particularly fertile investment niche. Financial strains on health services worldwide (driven by ageing populations and increasing treatment costs) have placed unprecedented pressure on care quality. Public and private sectors alike are looking at ways of using AI to enhance healthcare and medical practice globally; from GP surgeries striving to improve patient care, through to new drug discovery in the biopharma space.
Other sectors particularly active in adopting AI of late include publishing, finance and manufacturing. A diverse range of marketplaces united by their demand for automation. Just as a car manufacturer could save time through intelligent machinery, similarly a publishing house or bulge bracket bank could gain efficiencies by investing in machinery (such as proofreading for audit technology) which removes the need for multiple layers of human involvement.
What the big players are up to
There’s certainly still investment appetite among the big players which straddle the CVC/VC ecosystem. The Japan-based Softbank Group played a prominent role throughout 2018, investing a total of $28 billion on technologies ranging from facial recognition to vehicle automation. The group aims to step it up a gear this year with its second fund, raising another £108 billion dedicated to AI.
Additionally, Intel Capital has already invested $177 million in AI start-ups this year alone. Other VC firms, like Andreessen Horowitz are increasingly focusing more energy on investments which center on companies developing software for intelligence, reconnaissance and understanding the immune system. Just this week Lux Capital has announced it’s raised over $1 billion across two new funds which will have a heavy focus on AI both at early stage and growth levels. Combined with the news of Deena Shakir joins as an investment partner from Google Ventures—there’s clear sign that many are looking to increase skin in their skin in the game.
The missing ingredient
Yet, amid the positive news, something still seems to be missing. Given the potential of AI to dramatically transform global commerce (the World Economic Forum estimates that global GDP could be 14% to 16% cumulatively higher in 2030, due to the introduction of applied AI), the true potential as a corporate investment has yet to be fully realised. Take Europe–home of AI hubs London, Paris, Frankfurt and, most recently, Stockholm: the EU’s share of AI investment as a proportion of global equity investment is only 9%. Moreover, in Asia, deal values for AI start-ups are still mostly in the mid-market range (only two startups in Q1 attracted more than $1 billion of VC funding). There is an argument which says AI investment should be rocketing; instead it seems to be levelling out. Recent data released from China which shows a 77% drop in VC investment certainly plays into the overall number and could be a simple answer for why global growth has tapered off.
On the one hand, this steadying of investment could simply be a sign of both the industry and venture funding maturing, with the height of seed level investments now behind us. Seed funding has been tapering off since its peak in 2016, whereas the market for growth and later-stage “startups” is increasing. Many AI companies are on their fifth or sixth round of funding, and so it’s somewhat understandable that investors are eager to see how resilient their investments are given we’re still a few years away from many vesting any real returns for investors. Ally that with the fact that the first few months of 2019 have been a period of “less adventurous venture capital” overall (as one corporate lawyer recently put it), with investors losing their appetite for brand new ventures compared to last year.
Looking forward
Equally, the term “AI” has enjoyed a number of years now as the hottest tech in town, and recent reports outlining the facts that some startups are making false claims that they are truly AI at the core, means investors are undertaking more stringent due diligence in equal measure with market scepticism. There are also legal concerns, ranging from privacy safeguards on data harvesting, to liability for autonomous vehicle operators, which governments have not yet resolved. Will these concerns, combined with a foreboding economic climate, further slow AI investment? Unlikely–but it may make VCs more targeted in their investment. Many VCs are now looking at AI which can help businesses in bad economic climates (such as supply-chain AI which could save the struggling U.S. retail sector $339 billion, rather than technology which is perhaps more of a nice-to-have given the rhetoric of a looming economic downturn.
Overall, the long-term signals are extremely positive. We are likely to look back on H1 as a period of investor reflection, and market maturity, rather than correction. This will give rise to a sustained period of expansion with a growing number of companies seeking later-stage funding for investors to identify. As the U.S.-China trade war continues to unravel, and Brexit finally comes to fruition it will be interesting to see those who have honed a level of resilience to general market noise, and truly believe in the ground-breaking opportunity AI presents for business, society, and their funds.
originally posted on Forbes.com by Daniel Pitchford
