The AI Hype Cycle is Running Red Hot
Barely six months have passed since OpenAI unleashed ChatGPT onto the savanna and with that release brought the world of generative AI into the heart of business, and increasingly, public consciousness.
According to Goldman Sachs generative AI could drive a seven percent (or almost $7tn) increase in global GDP as a result of lifting productivity growth by 1.5 percentage points over a 10-year period. (It was actually another Goldman claim – that AI would replace 300 million jobs that scored all the headlines).
According to two of the firm’s economists, Joseph Briggs and Devesh Kodnani, “Despite significant uncertainty around the potential for generative AI, its ability to generate content that is indistinguishable from human-created output and to break down communication barriers between humans and machines reflects a major advancement with potentially large macroeconomic effects.”
No wonder business leaders are suddenly ChatGPT experts, after a decade of AI indifference that led management consultancy McKinsey and Company to suggest AI adoption was flatlining, an opinion it inconveniently published just a few days after the ChatGPT release on November 30, 2022. (It quickly rushed out a more upbeat Gen AI note a few weeks later).
The resurgence in the interest of the impact of AI has been dramatic.
A Gartner poll of more than 2,500 executive leaders, found 45 percent said that the publicity of ChatGPT has prompted them to increase artificial intelligence (AI) investments. The poll revealed that 70 percent of executives said that their organisation is in investigation and exploration mode with generative AI, while 19 percent are in pilot or production mode.
“The generative AI frenzy shows no signs of abating,” said Frances Karamouzis, Distinguished VP Analyst at Gartner. “Organisations are scrambling to determine how much cash to pour into generative AI solutions, which products are worth the investment, when to get started and how to mitigate the risks that come with this emerging technology.”
The technology research firm has identified five areas where it says generative AI will have a potentially huge impact – none of them, by the way, involved Google search.
Instead, the five areas are drug design, material science, chip design, synthetic data (such as healthcare data can be artificially generated for research and analysis without revealing the identity of patients whose medical records were used to ensure privacy), and manufacturing for parts design.
Follow the Money
Despite the difficulties venture markets have faced recently, money is flowing into generative AI firms. In Q1 2023 roughly $1.7bn was invested across 46 deals, according to PitchBook data published in its Vertical Snapshot, Generative AI report March 2023. (Although deal flow was still down on a year ago, Pitchbook noted that an additional $10.68bn worth of deals were announced in the quarter, but had not yet completed).
Since we reported on the OpenAI/Microsoft deal worth an alleged $10bn, Anthropic, the Bay Area Gen AI firm, has raised $450mn in series C funding in a round led by Sparc Capital with money from Google, Salesforce Ventures, Sound Ventures and Zoom Ventures. Founded by former OpenAI execs, Anthropic sports an eclectic set of investors including Google chair Eric Schmidt and, reportedly, the founder of failed FTX, Sam Bankman-Fried.
Beyond Microsoft’s mega OpenAI financing deal, Anthropic’s capital raising is the largest. Here are some of the other key deals of the last year:
Adept AI: raising $350mn in late May 2023 to fund its quest to develop AI models to automate intricate software workflows.
Cohere: hot on the heels of its $125mn raise last year, according to an FT report, soon to close $250mn, valuing the business at ~$2bn (way shy of the $6bn valuation it sought late last year.)
Video: WSC Sports which generates personally tailored video clips for fans raising $100mn a year ago in a series D round.
Jasper: a writing tool to create original content raising $125mn in October last year in a round led by Insight Partners.
At the smaller end of the pipeline, music AI firm Boomy wants to help users make original songs even if they don’t have a musical bone in their body. It raised $3.1mn in June, while Soundraw scored seed funding of $1.4mn to generate music from AI that circumvents the need for royalty payments.
It's the ubiquity of generative AI’s impact that has investors excited.
According to Sequoia Capital: “Every industry that requires humans to create original work — from social media to gaming, advertising to architecture, coding to graphic design, product design to law, marketing to sales — is up for reinvention.”
The firm says some functions may be completely replaced by generative AI, while others will experience an acceleration in the creative cycle due to accelerating human and machine interaction.
Sequoia argues that we are entering the third wave of generative AI where it becomes better, faster, and cheaper. “For developers who had been starved of access to LLMs, the floodgates are now open for exploration and application development. Applications begin to bloom.”
Investment bank Piper Sandler meanwhile believes that generative AI is “… the next major revolution in technology that could have far reaching implications across both consumer and enterprise sectors. The democratisation of foundational LLMs via APIs suggest the rapid pace of innovation could occur at an unprecedented pace.”
Its comments were contained in a report for clients, and reported in Barrons, that flagged a number of potential winners including Nvidia (See Hardware and Hyperscalers are the Picks and Shovels of the AI gold rush), Microsoft, Alphabet, Meta Platforms, Snowflake, Oracle, Intuit, Duolingo, Arista Networks, Five9, NICE, Autodesk, Gitlab and Doximity.
Bringing Smarts to Marketing
Among the digital giants, Microsoft via its share of OpenAI and most famously through its integration of ChatGPT with Bing, and Google (after an initial misstep) with Bard have stolen much of the initial limelight.
At stake are Google’s rivers of gold – search advertising revenue which the company has dominated outside of the US for two decades (within the US, a fair chunk of that revenue has migrated to Amazon’s ecommerce search, but that’s another story).
Across the wider marketing industry, the ability of generative AI to create content is seen as a genuinely disruptive force according to Bain and Company. Marketing is one of the top areas in which AI use cases are being deployed, due to its blend of data-driven and creative work, and AI’s ability to engage customers and personalise content.
In a study by Bain and Company of nearly 600 companies across 11 industries, 39 percent of respondents said they were using or considering using Gen AI to speed up the development of marketing materials. The experimentation (68 percent), marketing mix models (64 percent), and personalisation (64 percent).
Little wonder then that SaaS vendors are scrambling to add generative AI capabilities to their platforms. Adobe was first out the door earlier this year with Firefly, its own generative AI play to speed up campaign creation.
But it’s hardly alone. In addition to Adobe, Salesforce, Sitecore, Microsoft, Google, Zoom, HubSpot, Mailchimp, Zendesk, and Pegasystems have all added generative capabilities, and across the wider SaaS landscape beyond marketing that list is already swelling towards 100 companies.
It's likely the start of an AI battle royale in the SaaS sector. According to Zach Coelius, Managing Partner at early-stage VC firm Coelius Capital writing in LinkedIn earlier this year, “AI has suddenly put every enterprise SaaS company back on a start-up product tempo whether they like it or not. Usually product congeals in the first couple of years and changes very little after that. AI has now created huge inflection potential and speed is critical.”
(Image by Dall-E 2: “The AI Hype Cycle is Running Red Hot”).