Talk to your average venture capital investor about the funding environment these days, and chances are they’ll describe some challenges or an overall slowdown, save for one area: Oh, except A.I. is crazy, or, Where we are really excited is in A.I., et cetera.
Generative A.I. in particular is becoming increasingly popular with investors rushing to get in early on the next big thing. But how much are they actually paying? And why do they think it’s worth it? I recently took a closer look at just how crazy generative A.I. valuations have gotten—and why not all kinds of A.I. startups are fetching such high prices. As I reported:
[David] Beisel [co-founder and partner at NextView Ventures] likens the current moment for generative A.I. to a transitional shift, akin to “a browser moment” or “a social networking moment.” And given one look at the data, he’s clearly not alone.
According to PitchBook data provided to Fortune, the median pre-money valuation for generative A.I. firms soared to $90 million so far this year, based on nine deals PitchBook has tracked through March 29, up from $42.5 million for 2022. Those big numbers are boosted by big deals for the likes of Anthropic and Tome, and early stage A.I. startups addressing use cases like software, customer experience, and media generation are seeing high valuations. While it’s still early days in 2023, that data “suggests that investor momentum will be on early stage startups in this new wave of A.I., rather than supporting late stage vendors” and those using more classical (and older) models, Brendan Burke, a senior emerging technology analyst at PitchBook, who covers A.I., told Fortune. In fact, in a recent report on generative A.I., PitchBook analysts predicted that at a 32% compound annual growth rate (CAGR), the market could reach $98.1 billion by 2026.
VCs are salivating over how fast innovations are happening in the large language model space, and how good the technology is. They see applications in a variety of other areas, including consumer and enterprise use cases for things like marketing and software (as I recently wrote about). And Gaurav Gupta, a partner at Lightspeed Venture Partners, made his case for why these prices could be justified: With the recent release of GPT-4, OpenAI’s latest system, and other innovations in the space, it’s “becoming more and more clear that all of these existing software categories can be disrupted by the tech,” he told me.
For the full breakdown of the data and more in-depth insights from VCs, you can dig into my deep dive here. But one thing’s for sure: Given how much cash investors are chipping in at steep prices for these generative A.I. startups, it is a gamble. As Gupta told me, “there's gonna be a lot of money lost.”
We’ll have to wait and see whose bets pay off.
Tiger Global looks for the exit: In true 2023 slowdown fashion, mega tech investor Tiger Global Management has reportedly been trying to sell off some of its stakes in venture capital firms in recent months, per a report from The Information. According to the report, Tiger partners had committed at least $80 million to VC funds including Better Tomorrow Ventures, Chapter One Ventures, and Moxxie Ventures last year (it’s unknown if they sold any stakes yet). Notably, Tiger's reported move comes as the firm is also aiming to raise a smaller amount for its venture fund, as the Wall Street Journal reported in February that Tiger is currently looking to raise $5 billion, down from $6 billion last year.
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
Submit a deal for the Term Sheet newsletter here.
Correction: The online version of yesterday’s newsletter has been corrected to reflect that Crunchbase plans to become profitable in the next two years, not four to five.
Jackson Fordyce curated the deals section of today’s newsletter.
