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May 29, 2019

VC Funding for AI Slows, But Don’t Expect Another AI Winter Just Yet

Alex Woodie

(Artram/Shutterstock)

AI firms attracted a record $9.33 billion in investments from venture capital firms in 2018, which was nearly a 10% increase from 2017. So far this year, AI funding has dipped a bit, but that doesn’t mean another AI winter is coming.

AI firms attracted $2.0 billion in investments during the first quarter of 2019, according to PwC’s MoneyTree report. It was the second straight quarter of a decline in AI investment, after VCs spent $2.6 billion on AI startups in the fourth quarter of 2018 and $2.7 billion in the third quarter, which in retrospect is looking like a blockbuster quarter for deals.

Close to half of all artificial intelligence funding for the first quarter was driven by a single investment – the $940 million that the Japanese bank SoftBank Group gave to Nuro, a Mountain View, California-based robotics company, according to the report.

While the value of VC investments in AI startups has declined for two straight quarters, the number of deals has stayed relatively constant. There were 112 deals in the third quarter of 2018, compared to 104 in the fourth quarter and 116 in the first quarter of 2019.

Source: PwC MoneyTree 1Q19 Report

All of the biggest AI investments in the first quarter of 2019 were for expansion stages. In addition to Nuro, the MoneyTree Report identified five investments that range from $40 million to $65 million in a range of startups, all of which are based in the San Francisco Bay Area except for one, which is based in Austin, Texas.

Investment in AI might be down a tad, but there is a real bullishness in the use of AI and machine learning to automate human tasks and decision-making. According to IDC, AI is expected to attract nearly $36 billion in spending in 2019, a 44% increase from 2018. Through 2022, AI spending is expected to more than double to $79 billion, representing a compound annual growth rate (CAGR) of 38%.

“Significant worldwide artificial intelligence systems spend can now be seen within every industry as AI initiatives continue to optimize operations, transform the customer experience, and create new products and services,” Marianne Daquila, an IDC research manager, said in March. “The continued advancement of AI-related technologies will drive double-digit year-over-year spend into the next decade.”

The United States is expect to attract two-thirds of the AI spending this year, with retail and banking industries taking the lead, followed by Western Europe. Over the five-year period, Japan is expected to have the strongest spending growth, with a 59% CAGR, while the rest of Asia and China will follow with 51% and 50% CAGRs, respectively.

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