According to S&P Global, funding for generative AI is expected to reach new heights in 2024, with venture capital investments projected to exceed USD 22.7 billion.

New Delhi, India October 22: The generative AI (GenAI) funding landscape is set to achieve record-breaking levels in 2024, with venture capital investments expected to exceed last year's total of USD 22.7 billion, according to a report by S&P Global Market Intelligence. 

This surge in funding has been driven by significant mega-rounds from major players like OpenAI LLC and Anthropic PBC, highlighting the growing optimism surrounding GenAI's transformative potential. In the first three quarters of 2024, funding for GenAI startups has already surpassed USD 20 billion, putting it on track to exceed the previous year's record.

Key funding deals include X.AI Corp.'s USD 6 billion round in the second quarter and OpenAI's USD 6.6 billion raised in the third quarter. Anthropic has already secured USD 8.8 billion and is reportedly seeking further investment. The second and third quarters of 2024 have recorded the highest quarterly funding totals since the first quarter of 2021, which saw Microsoft Corp. invest USD 10 billion in OpenAI.

The frontier foundation model sector is becoming increasingly competitive, with new entrants like Elon Musk's X.AI and Ilya Sutskever's Safe Superintelligence Inc., which recently raised USD 1 billion. Currently, at least six frontier foundation models are operational in the US and Europe, with more expected. While established entrepreneurs attract strong investor interest, developing a foundation model remains costly, and competition is fierce, especially against tech giants like Alphabet Inc. and Meta Platforms Inc., which have substantial financial resources.

Despite the significant cash burn, investor confidence remains high due to the rapid revenue growth in the GenAI sector. According to S&P Global, referencing a Stripe Inc. report cited by the Financial Times, GenAI companies are achieving USD 30 million in revenue faster than previous tech sectors, including software as a service.

Smaller model providers are struggling to compete with the latest flagship models and are shifting their focus towards enhancing open-source model performance through new tools. This intense competition is prompting some companies to alter their strategies or exit the market. Inflection AI Inc. and Aleph Alpha GmbH have pivoted to assist enterprises in adopting GenAI, while Anthropic is reportedly looking for additional funding, potentially increasing its valuation to USD 40 billion.

Arun Bharath, chief investment officer at Bel Air Investment Advisors, remarked, "This is a game of survival; if you are not early to build the moat around you, you are going to be left behind."

Investments in GenAI applications, where startups integrate third-party foundation models with their own data to develop new use cases, have already surpassed levels seen last year. These companies are targeting sectors like search, customer service, and software development, where GenAI can significantly improve efficiencies. For instance, Perplexity AI Inc. and Ai Search Inc. are reportedly seeing rapid revenue growth, indicating that Google's dominance in search may be challenged.

Startups are also focusing on niche markets like legal and healthcare, where GenAI tools can enhance processes. Appella AI, a stealth startup, has recently shifted its strategy from broad customer engagement tools to specializing in fashion e-commerce, aiming to provide hyper-personalized shopping experiences.