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January 19, 2018

VC Firms Invest Heavily in AI, Pushing Hype Bubble Bigger

Venture capital firms invested record amounts of money into artificial intelligence last year, according to the latest PwC/CB Insights MoneyTree Report, which tracks global VC investments across all industries. As the hype over AI builds, some wonder when the bubble will pop.

According to the MoneyTree Report, total funding for AI-related firms accounted for a total of $5 billion invested across 444 deals in 2017. That’s a 28% increase compared to 2016, when $3.9 billion was invested across 417 AI-related deals, PwC/CB Insights says.

The AI investments are spread across a variety of industries, according to PwC partner Anand Rao, who saw the most activity in the technology, automotive, financial services, healthcare and pharmaceuticals, and retail sectors.

There was more than $1 billion invested in AI-related firms in each quarter in 2017, a pace of investment that PwC expects to continue. “I think AI funding in 2018 will be similar to the record-high 2017 levels,” Rao tells Datanami.

It’s hard to avoid AI these days, and everybody seems to be talking about it – in the news, on the TV, and across the Internet. We’re told how the FANG companies (Facebook, Apple, Netflix, and Google, plus Microsoft) are leading the way in developing AI-based techniques to serve us better content, while businesses across industries scramble to capitalize on the creations.

Source: PwC/CB Insights MoneyTree Report

Many are predicting 2018 will be the year of AI, which is another way of saying that machine learning and – in particular — deep learning approaches are ready to be utilized in a widespread manner. As the hoopla around Hadoop dies down, it’s apparent that, in the world of ideas, AI seems to be taking the torch from big data and running with it.

The whole concept of AI is catching on, even if there are big differences in how people use and understand the phrase. While consumers may think that AI refers to super-intelligent robots that will serve or replace humans, most technologists use the phrase much more narrowly.

This AI understanding gap showed up this week when Facebook’s director of AI Yann LeCun called out the developers of Sophia, a “lifelike” robot that was developed with AI technologies like speech recognition, facial recognition, and natural language processing (NLP). LeCun took issue with how Hanson Robotics portrays Sophia (pictured at top of story) as being capable of actually learning.

Regardless of its perception, AI is attracting big attention. A 2017 study by data analytics firm Teradata found that 80% of the 260 enterprises it surveyed were investing in AI. The respondents said they’re looking to AI to help with product development, to improve customer service, and make supply chains more efficient. “Despite the potential barriers to entry,” the study stated, “businesses think AI is here to stay and expect both short- and long-term gains from investments in the technology.”

In another survey, NLP technology developer Narrative Science found that 61% of companies it surveyed had deployed AI in 2017. Meanwhile, Red Hat found that 30% of respondents in its survey plan to implement AI for field service workers in 2018.

While it’s true that money is currently pouring into AI and that there are advantages to using machine learning approaches to identify potentially useful correlations hidden in huge amounts of data, it’s also apparent that there is some degree of irrational exuberance connected to AI. But when the market reality check will begin is anybody’s guess.

“There is definitely a ‘hype bubble’ in AI,” PwC’s Rao says. “When the ‘hype bubble’ will burst is tied more to the overall market.”

The overall VC climate remains strong as the current bull market closes in on its 10th birthday. However, the VC market is currently skewed towards larger firms and “mega rounds” of funding in excess of $100 million. PwC/CB Insights dubbed it the “Softbank Effect,” after Japanese telecom giant that has taken a multi-billion-dollar stake in Uber.

“2017 closed strong because of mega-round activity – a theme throughout the year,” said Anand Sanwal, co-founder and CEO of CB Insights. “This is the entry of large, deep pocketed investors, ranging from Softbank to sovereign wealth funds from around the globe investing in insurgent startup companies.”

This shift to bigger deals coincided with a pullback from early stage activity compared to recent years. “Deals are still being completed, especially the bigger ones,” Sanwal says, “but the early-stage activity which is vital to the VC ecosystem’s health did take a hit.”

However, there is still lot of seed capital for startups available in VC accounts. “So it’s likely to bounce back,” Sanwal says.

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