The AI Investment Boom: Investors Chase Startups Amid Rapid Growth and Ethical Challenges

Why are Investors Chasing AI Startups?

On 17 October 2024, Marty Kausas, the co-founder of Pylon, a startup that supports B2B companies, took to the social media platform LinkedIn to announce the unexpected funding that the company raised. "We raised Pylon's $17M Series A in 14 days. We didn't need the money," Kausas said. Being cash flow positive and having steady business growth, his team was busy building the product than focusing on fundraising. "We really did not want to fundraise. We felt it would be a massive distraction since we had only burned $300k of our $3.3M previously raised," Marty said. But call it a stroke of fortune. In a span of two weeks, Kausas and his two other co-founders had funding offers from four of the five investors who showed interest in their business. Not wanting to risk losing the opportunity, they accepted the funding, ceding some stakes. Plush with funds, Pylon now plans to hire more engineers to build a larger quantity of products faster in the near future. Marty told AIM they intend to build a go-to-market (GTM) team to increase efficiency in launching new products. He stated that investors backed them because they wanted to build a big company really fast. "We are more ambitious than they are," Kausas said. After the boom of AI startups and the launch of ChatGPT by OpenAI in late 2022, there has been a surge in investors willing to invest large amounts of money in tech startups. This is in contrast to 2021 when low interest rates pushed investors to be cautious about investing in startups. However, demand has risen for Generative AI ever since, as it can create content, in contrast to traditional AI, which learns from existing data. This landscape has been heavily influenced by big tech players like Microsoft and Amazon. These giants collectively spent $15.3 billion in 2023 instigating firms like OpenAI and Anthropic. Their numbers not only keep the market up but also attract interest from other investors. The yearly global venture capital (VC) investments in 2023 rose to $21.3 billion, a high rise from the approximate $1 billion in 2018. As the market swiftly switches from investments in general-purpose LLMs (horizontal AI) to specific and niche (vertical AI) GenAI, EY predicts that the number of deals will only increase over the coming years. The valuation graph for AI startups presented by EY as per their analysis in May 2024: The US still remains at the forefront of GenAI investments but there is high optimism for growing opportunities in Europe. Europe has created quite promising startups like Mistral and Wayve, despite being a foot behind the US currently. This could be favourable for countries like Ireland that are geographically well-located and could attract major VC funding. Their tech ecosystems and likeable business environments could also add an advantage. "France has shown with Mistral that it can produce an AI unicorn that is looking to take on OpenAI and other US incumbents," said Grit Young, EY Ireland Valuations Partner. Some business models may not be able to keep up with the fast pace of technological change despite all the excitement surrounding GenAI. This has cautioned the investors to consider their approach after careful consideration, looking at long-term strategies as they have realised that GenAI is still in the early stages of development. Investing companies are highly aware of risks regarding the implementation of new tech. The risks involve companies exposing themselves to regulatory inquiries which could spark damage to their reputation. Considering such cases, investors are seeking out startups that are capable of risk management. The venture capitalists also need to keep up with rising AI competition. Differentiating between these startups is the key after dealing with the pressure to generate quick returns. This often comes in between the patience required to develop sustainable and future-resistant models. AI is no longer just a niche technology -it is now a major force in the world of VC. By 2024, it is expected to attract $12 billion in global investments. VCs are already AI to speed up deal-making, manage risks and build up industries like healthcare and climate tech in the process. But as the competition for AI investments ramps up, there's more to consider than just profit. VCs need to prioritise responsible investing, which means paying close attention to ethics and staying on top of regulations. The next decade will see a wave of AI-driven startups, and investors will have to find a balance between making money and doing the right thing. Those who can blend AI into their investment strategies while keeping ethics front and centre will be the ones shaping the future of both tech and society. It's an exciting space, but it comes with a lot of responsibility. Finding that sweet spot between innovation and integrity is what will really set investors apart in this fast-moving landscape.

Why are Investors Running Behind AI Startups?

On 17 October 2024, Marty Kausas, the co-founder of Pylon, a startup that supports B2B companies, took to the social media platform LinkedIn to announce the unexpected funding that the company raised. "We raised Pylon's $17M Series A in 14 days. We didn't need the money," Kausas said. Being cash flow positive and having steady business growth, his team was busy building the product than focusing on fundraising. "We really did not want to fundraise. We felt it would be a massive distraction since we had only burned $300k of our $3.3M previously raised," Marty said. But call it a stroke of fortune. In a span of two weeks, Kausas and his two other co-founders had funding offers from four of the five investors who showed interest in their business. Not wanting to risk losing the opportunity, they accepted the funding, ceding some stakes. Plush with funds, Pylon now plans to hire more engineers to build a larger quantity of products faster in the near future. Marty told AIM they intend to build a go-to-market (GTM) team to increase efficiency in launching new products. He stated that investors backed them because they wanted to build a big company really fast. "We are more ambitious than they are," Kausas said. After the boom of AI startups and the launch of ChatGPT by OpenAI in late 2022, there has been a surge in investors willing to invest large amounts of money in tech startups. This is in contrast to 2021 when low interest rates pushed investors to be cautious about investing in startups. However, demand has risen for Generative AI ever since, as it can create content, in contrast to traditional AI, which learns from existing data. This landscape has been heavily influenced by big tech players like Microsoft and Amazon. These giants collectively spent $15.3 billion in 2023 instigating firms like OpenAI and Anthropic. Their numbers not only keep the market up but also attract interest from other investors. The yearly global venture capital (VC) investments in 2023 rose to $21.3 billion, a high rise from the approximate $1 billion in 2018. As the market swiftly switches from investments in general-purpose LLMs (horizontal AI) to specific and niche (vertical AI) GenAI, EY predicts that the number of deals will only increase over the coming years. The valuation graph for AI startups presented by EY as per their analysis in May 2024: The US still remains at the forefront of GenAI investments but there is high optimism for growing opportunities in Europe. Europe has created quite promising startups like Mistral and Wayve, despite being a foot behind the US currently. This could be favourable for countries like Ireland that are geographically well-located and could attract major VC funding. Their tech ecosystems and likeable business environments could also add an advantage. "France has shown with Mistral that it can produce an AI unicorn that is looking to take on OpenAI and other US incumbents," said Grit Young, EY Ireland Valuations Partner. Some business models may not be able to keep up with the fast pace of technological change despite all the excitement surrounding GenAI. This has cautioned the investors to consider their approach after careful consideration, looking at long-term strategies as they have realised that GenAI is still in the early stages of development. Investing companies are highly aware of risks regarding the implementation of new tech. The risks involve companies exposing themselves to regulatory inquiries which could spark damage to their reputation. Considering such cases, investors are seeking out startups that are capable of risk management. The venture capitalists also need to keep up with rising AI competition. Differentiating between these startups is the key after dealing with the pressure to generate quick returns. This often comes in between the patience required to develop sustainable and future-resistant models. AI is no longer just a niche technology -it is now a major force in the world of VC. By 2024, it is expected to attract $12 billion in global investments. VCs are already AI to speed up deal-making, manage risks and build up industries like healthcare and climate tech in the process. But as the competition for AI investments ramps up, there's more to consider than just profit. VCs need to prioritise responsible investing, which means paying close attention to ethics and staying on top of regulations. The next decade will see a wave of AI-driven startups, and investors will have to find a balance between making money and doing the right thing. Those who can blend AI into their investment strategies while keeping ethics front and centre will be the ones shaping the future of both tech and society. It's an exciting space, but it comes with a lot of responsibility. Finding that sweet spot between innovation and integrity is what will really set investors apart in this fast-moving landscape.