Artificial intelligence startups experienced an eventful year in 2023. From widespread experimentation with AI tools to startups securing funding at 2021 valuations, the landscape showcased remarkable highs and notable shutdowns. The year concluded with significant drama surrounding Sam Altman and OpenAI, alongside the New York Times’ lawsuit against the tech giant. As we reflect on the past, predicting the future of AI startups in 2024 remains challenging. Yet, savvy investors are in the business of making informed predictions.
Most investors shared optimism that funding for AI startups will maintain its momentum, signaling a shift from initial hype to the emergence of sustainable businesses. Many believe 2024 could mark the dawn of a new wave of verticalized AI startups, focusing on niche sectors rather than simply layering technologies created by giants like OpenAI and Google.
Lisa Wu, a partner at Norwest Venture Partners, highlights that vertical AI presents an attractive investment opportunity this year. She notes that these startups are less likely to be replicated easily by established firms like Microsoft and Google, reducing investment risk. Wu explains, “These AI applications leverage in-depth knowledge of user workflows and industry-specific training data, enhancing productivity for teams and employees.” For instance, law firms that harness AI can provide their services more efficiently, lowering costs and improving litigation outcomes.
Several venture capitalists echoed this sentiment, expressing a keen interest in AI startups developing sector-specific solutions. Sarah Sclarsic, founding partner at Voyager Ventures, is already supporting companies using AI to tackle climate change issues, hoping for more entrants in this category in 2024. Similarly, Grace Isford of Lux Capital and Tasneem Dohadwala, founding partner of Excelestar Ventures, anticipate further developments in AI applications within healthcare and biotechnology.
Enterprise Adoption
Investors like Sarah Guo, founder of Conviction, foresee 2024 as a pivotal year for enterprise-focused AI startups. While a mix of consumer and enterprise-focused startups emerged in 2022 and 2023, consumer products like DALL-E and ChatGPT dominated early adoption. Now that large corporations have refined their AI strategies and identified high ROI areas, enterprise adoption is expected to surge.
Guo explains, “Customer buying behavior is evolving from initial interest and strong directives from leadership to incorporate AI in 2023, to sophisticated evaluations and broader operationalization of AI products in 2024.” Sailesh Ramakrishnan, managing partner at Rocketship.vc, agrees, predicting enterprise startups will be the main driver of AI investment this year, securing capital at more favorable valuations than their consumer-oriented counterparts.
Michael Marks, founding managing partner at Celesta Capital, adds that the rapid growth of AI funding will intensify in key subsectors, particularly through proprietary enterprise applications that cater to heightened privacy and data security requirements in finance, insurance, and defense. Some VCs believe that 2024 will signal a shift in how companies in the space are identified, moving beyond the term “AI companies” as AI becomes an integral part of software development.
“What defines an AI company?” asks Ed Sim, founder of Boldstart. “We view it as just another technology, akin to the internet or mobile, which will be infused into every product that meets consumer needs and offers value.”
Big Picture
Should the market focus on AI startups with strong business fundamentals and clear use cases in 2024, existing startups that thrived on previous funding cycles may face challenges. Pradeep Tagare, head of investments at National Grid Partners, anticipates a widening gap between robust startups and those that attracted investments based solely on hype.
Elena Mazhuha, investment director at Flyer One Ventures, concurs, noting that many startups from last year might struggle to secure new funding in 2024. “Companies that raised money in 2023 may face difficulties,” she cautioned. “This includes startups making ‘wrappers’ for major algorithms or those using AI merely as a feature, rather than developing it into an essential product.”
Such shakeouts reflect the natural evolution of a burgeoning industry; startups and investors need time to identify where resources should be allocated. While many VCs may wish to distance themselves from earlier AI investments, their overall outlook remains positive. Kevin Lalande of Santé and Don Butler of Thomvest Ventures both agree that the most exciting opportunities in AI are still ahead of us.
“I believe 2024 will be one of the most promising years for AI investing,” Butler stated. “Despite the speculative nature of the market, 2024 and 2025 will likely see the emergence of groundbreaking companies. Historically, transformative technologies—like the iPhone—often lead to the most innovative startups being founded one to three years thereafter.”
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