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Artificial intelligence startups are getting 40% of the venture capital funding that goes to cloud companies, according to venture capitalist Accel.
In the last year of each year Euroscape reportwhich tracks key cloud and AI trends, Accel said venture funding for cloud startups based in the US, Europe and Israel is expected to rise to $79.2 billion this year, with artificial intelligence fueling much of the recovery.
Venture funding for the cloud industry rose 27% annually, marking the first year of three years of growth. Cloud startups raised $62.5 billion in Europe, Israel and the US in 2023, the report found.
The funding is up 65% from the $47.9 billion cloud companies raised four years ago, according to Accel.
OpenAI, the Microsoft-backed company behind ChatGPT AI creation buzzy chatbot earlier this month. It raised $6.6 billion in a massive funding round which valued the startup at $157 billion.
AI is eating software
Much of the growth in cloud funding is the excitement around AI.
“AI is sucking the air out of the room” when it comes to the cloud, Accel partner Philippe Botteri told CNBC in an interview this week. “This is visible in the public market and in the private market.”
As of September 30, the Euroscape index—a public selection of US, European and Israeli cloud companies managed by Accel—is up 19% year-to-date.
This pales in comparison to the Nasdaq’s 38% rise this year and also the Euroscape index’s 39% fall to its 2021 peak.
The cloud industry has experienced tough times beyond AI, with enterprise software budgets squeezed by macroeconomic and geopolitical risks.
“There’s a lot of uncertainty out there,” Botteri said, adding that businesses are increasingly asking questions about geopolitical tensions and macroeconomic factors that have affected software spending priorities.
Not a single company in Accel’s Euroscape index has experienced annual revenue growth of more than 40%, compared to 23 businesses that achieved the feat in 2021.
“IT budgets are shifting towards AI,” Botteri said. “They are still growing a little, but they are growing a few percent year after year.”
“Part of the budget that goes towards genAI, building new applications, testing these new technologies, so there’s less for the rest,” added the VC investor.
Focus on basic models
Six AI startups in the US, Europe and Israel respectively accounted for roughly two-thirds of the funding raised by all genAI startups, according to Accel’s Euroscape report.
OpenAI raised a major $18.9 billion in 2023-24, taking the lion’s share of VC funding for US genAI companies.
“When you look at OpenAI and the speed at which it got to over $3 billion in revenue, this has been one of the fastest growing software companies of all time,” Botteri said.
Anthropic raised the second-highest amount among US genAI startups at $7.8 billion, while Elon Musk’s xAI came in third.
In Europe, the largest amount of funding went to Britain’s Wayve, France’s Mistral and Germany’s Aleph Alpha.
Globally, companies that build so-called foundational models, which power many of today’s AI creation tools, account for two-thirds of the overall funding of AI creation companies, Accel said.
Big Tech’s AI splurge
The US took the lead globally in terms of overall investment in regional AI creation.
Of the total $56 billion invested in genAI companies globally in 2023-24, roughly 80% of the money went to US companies, Accel said, adding. Amazon, Microsoft, google and Meta each investing $30 billion to $60 billion a year in AI.
AI “majors” like OpenAI, Anthropic and xAI are spending billions on the technology, Accel said, while smaller challengers including Cohere, H and Mistral invest tens to hundreds of millions a year.
Dev Ittycheria, CEO of the database company MongoDB, said that the concentration of the most powerful AI models is likely to consolidate in only a few players who are able to attract the necessary capital to train and run their systems in data centers and on chips. .
“Access to capital is going to have a big impact on the performance of these models,” Ittycheria said in an interview on CNBC’s “Squawk Box” on Tuesday. He added: “My bet is that over time you won’t have that many model suppliers, maybe down to one or two.”
