Microsoft, Google and Amazon flood AI start-ups with cash, outspending venture capital

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Microsoft shares edged up but fellow mega-caps Apple and Nvidia proved a drag on US stocks in regular and after hours trading.
Microsoft’s shares edged up 0.7 per cent in after-hours trading, following a 0.2 per cent gain during regular trading.

Big tech companies spent twice as much on deals with Generative AI start-ups than venture capital groups in 2023, according to new data from Pitchbook.

The FT has reported deals made by Microsoft, Google’s parent company Alphabet and Amazon accounted for two-thirds of the $27bn raised by AI start-ups this year.

Investor interest in AI has surged since Microsoft-backed startup OpenAI introduced ChatGPT in late 2022, according to a report from KPMG.

Venture capital investment, meanwhile, has been hurt by higher interest rates, an IPO drought and low exit opportunities. The number of venture capital deals involving generative artificial intelligence declined 27 per cent in the third quarter of 2023, according to Pitchbook.

Venture capital spending hit a global peak of $745bn in 2021 and has since seen a steep fall, while investment from big tech has nearly tripled since 2021.

 “Over the past year, we’ve seen the market quickly consolidate around a handful of foundation models, with large tech players coming in and pouring billions of dollars into companies like OpenAI, Cohere, Anthropic and Mistral,” partner at US venture firm Index Ventures Nina Achadjian told the FT.

“For traditional VCs, you had to be in early and you had to have conviction — which meant being in the know on the latest AI research and knowing which teams were spinning out of Google DeepMind, Meta and others.”

Start-ups generally have to partner with big tech companies to access the best growth opportunities, as big tech can provide access to cloud infrastructure, cash and chips.

Large deals this year include Microsoft’s $10bn investment in OpenAI, Amazon’s $4bn investment in San Francisco-based AI start-up Anthropic, and a $1.3bn investment in Inflection AI led by Microsoft and Nvidia.

Revenues of generative AI offerings across a broad range of categories are forecast to reach $3.7bn this year and expand to $36bn by 2028, according to S&P Global Market Intelligence.