Daily Management Review

Due To "FOMO" Caused By Generative AI, Tech Giants Are Investing Billions Of Dollars In Startups


Due To "FOMO" Caused By Generative AI, Tech Giants Are Investing Billions Of Dollars In Startups
The lack of acquisition activity by tech firms these days is primarily caused by an unfavourable regulatory environment. However, they're coming up with alternative ideas for how to blow billions of dollars on the next big thing.
This week, Amazon announced its largest venture deal to date—a $2.75 billion investment in artificial intelligence firm Anthropic—and provided yet another illustration of the AI gold rush that is driving the top internet corporations to open their wallets.
The AI model Claude, created by Anthropic, is a competitor to Google's Gemini and Microsoft-backed OpenAI's GPT. Apple, Meta, and other companies are rushing to include generative AI into their extensive product and feature portfolios in order to stay competitive in a market expected to generate over $1 billion in sales in the nest decade. 
According to PitchBook, investors invested a total of $29.1 billion in almost 700 generative AI investments in 2023, a 260% increase in value from the previous year.
The fact that a sizable portion of such funding originated from tech businesses rather than venture capitalists or other organisations made it strategically relevant. One of the things that drives their decisions, according to Fred Havemeyer, head of U.S. software research and AI at Macquarie, is a fear of losing out.
“They definitely don’t want to miss out on being part of the AI ecosystem,” Havemeyer said. “I definitely think that there’s FOMO in this marketplace.”
The big outlay is required since AI models are notoriously costly to develop and train, needing thousands of specialised chips, the most of which have come from Nvidia up to this point. The chipmaker Nvidia has seen its revenue increase by more than 250% year over year with the help of other companies, including Meta, which is building its own model dubbed Llama and has stated that it is spending billions on Nvidia's graphics processing units.
There are only so many businesses that can afford to participate in the market, whether they choose to develop or invest. In addition to creating the chips, Nvidia has become one of Silicon Valley's leading investors, investing in several start-up AI businesses, in part to ensure the widespread use of its technology.
In a similar vein, cloud credits are occasionally provided by Microsoft, Google, and Amazon in exchange for investments.
Both Amazon and Anthropic stated in their Wednesday announcement that they will collaborate closely in a number of ways. Anthropic intends to leverage Amazon Web Services and Amazon chips for their computational requirements. Amazon will distribute Anthropic's models to AWS users.
Anthropic unveiled Claude 3, their most potent model, earlier this month. According to the company, Claude 3 allows customers to input documents, images, charts, and other unstructured data for analysis and solutions.
Microsoft invested $1 billion in OpenAI in 2019, entering the generative AI investment space earlier.
Since then, its investment has increased to over $13 billion. Microsoft offers open source models on its Azure cloud and makes extensive use of OpenAI's model.
Alphabet is acting as both an investor and a builder. The business has redirected a large portion of its product development efforts on generative AI and its recently renamed Gemini model, which includes new features for documents, maps, search, and other areas. Google announced last year that it would spend $2 billion in Anthropic, having previously acknowledged that it had acquired a 10% interest in the startup in addition to a significant cloud contract between the two businesses.
According to Havemeyer, tech companies are investing in AI startups because these ventures fit with their product roadmaps, so they aren't merely cashing in on the "hype cycle."
“I don’t think it’s frivolous,” he said.
According to Havemeyer, partnerships with large cloud providers help businesses get clients in addition to providing much-needed funding.
"Come to us, work on our platform, have native access to the latest and greatest AI models, and also use our infrastructure," Havemeyer stated about the cloud businesses' approach. "It's also a component of a much bigger ecological drama."
“We’re seeing a lot of alliances appearing among those hyperscalers that have substantial scale, infrastructure and very deep pockets,” he added.
Tech executives emphasised the importance of generative AI in recent earnings calls, emphasising to investors that they must invest in startups or spend money on internal development in order to turn a profit.
The corporation was shifting its "workforce towards the AI-first work we're doing without adding material number of people to the workforce," according to Microsoft Chief Financial Officer Amy Hood last year. Microsoft, according to her, will keep making AI investments a top priority since it's "the thing that's going to shape the next decade."
In order to divert more money towards their AI initiatives, executives from Google, Apple, and Amazon have also indicated to investors that they are prepared to make significant departmental expense reductions.
Among the winners are startups.
In addition to OpenAI, Microsoft has invested in Mistral, Figure, and Humane. Prior to Inflection AI practically dissolving and joining Microsoft this month, the business invested in the startup. Mistral is an open source startup that uses the cloud provided by Azure and provides its services to Azure customers.
The startup Figure, which aims to create a human-like walking robot, has received funding from Nvidia, Microsoft, and OpenAI. It was valued at $2.6 billion last month.
Anthropic is Amazon's largest wager, having received $4 billion in funding to date. Hugging Face, a provider of open-source AI platforms, has also received funding from the corporation.
Essential AI, which develops consumer AI applications and is backed by AMD and Nvidia, is one of Google's investments. Additionally, Runway ML, a generative AI startup well-known for its visual effects and video editing software, is backed by Nvidia and Alphabet. Nvidia also has Mistral, Perplexity, and Cohere in its portfolio.
Many of the Big Tech businesses are still investing in internal model development during this time.
Through its Microsoft Research division, Microsoft has made investments in many of the methods that form the basis of generative AI. More than even OpenAI's GPT-4, Amazon apparently intends to train a larger, more data-hungry model.
Details of the work done by Apple researchers on the MM1 family of modest AI models—which can process both text and visual input—were recently published.
Compared to its competitors, Apple is unique in that it does not offer cloud services. Nevertheless, it is said that the internet behemoth is searching for AI partners, maybe including Baidu in China and Google in the United States. Regarding AI partners, an Apple spokeswoman declined to comment.
According to Daniel Newman, CEO of Futurum Group, a technology analysis organisation, IT businesses need to get creative in their AI investment strategies.
For instance, Microsoft's investment in OpenAI provided credits to use Microsoft's cloud service as well as profit sharing in a nonprofit wing. According to some accounts, Microsoft paid $1 billion in total for the acquisition of Inflection AI, making the agreement a costly acquisition.
Microsoft appointed Mustafa Suleyman, the inventor of Inflection AI, to oversee Copilot AI projects as part of the deal.
According to Newman, "I think we're starting to see some creativity and dealmaking." Regarding the deal that Amazon has with Anthropic, he stated that acquisition would be "much harder than investing."
This is because Big Tech is facing more scrutiny from regulators around the world, which makes large acquisitions more challenging. The investments themselves are coming under examination.
The Federal Trade Commission declared in January that it would launch a thorough investigation of the leading companies in the AI space, such as Amazon, Alphabet, Microsoft, Anthropic, and OpenAI.
The investigation is a "market inquiry into the investments and partnerships being formed between AI developers and major cloud service providers," according to FTC Chair Lina Khan. The regulator has the power to mandate that enterprises provide certain reports or provide written responses to inquiries about their operations.
“We know regulators are becoming increasingly focused on the traditional path of closing an acquisition,” Newman said. “Right now, the game is having access to the most fundamental IP.”