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Weekly Briefing Note for Founders

20th July 2023

This week on the startup to scaleup journey:
  • VC is not an industry in crisis
  • Grasping the potential of AI

VC is not an industry in crisis

The downturn in VC funding over the past 18 months has created a sense of an industry in crisis. But this is an extreme and narrow perspective. If we look at the broader picture of the venture landscape, we can see that this is in fact a 'reset' to the longer term trend, not an existential collapse. If Europe hits the anticipated $50B funding figure in 2023, then yes, this will be a huge drop from the 2021 peak. But it will still be roughly 35-40% ahead of what we saw in 2020 and 2019. As we said last week, even in a market downturn, Europe is on track to have its third largest year in terms of funding raised. If we look back over the past 20 years, we see that Europe now attracts 20% of global VC funding, up from 5% just two decades ago. European venture capital investment has increased 100x from less than $1B a year to $92B (2022) over this period. Most remarkably, it now attracts a third of all global Seed funding, up over 3x from 2003. And the amount of capital raised by VCs in Europe has also increased 100x in the last 20 years, helping drive the value of the Europe Tech ecosystem to a collective $2.5T. This is far from an industry in crisis, despite the recent market 'correction'.

As Dealroom's latest market report reveals, Fintech, Health, and Enterprise Software have been dominant sectors for VC funding in Europe over the last 20 years, followed by Transportation and Energy. Huge potential remains for the transformation of many yet undisrupted, “traditional” industries: Real Estate, Education and Insurance as well as certain Consumer segments such as Food, Travel and Fashion have seen very little VC funding in comparison to their large market sizes. New verticals have also emerged in recent years including Climate Tech and Quantum Computing, where Europe punches well above its weight in terms of its share of global funding. Climate Tech is particularly significant, standing at $24B or 31% of the global total for 2022 and 2023 YTD. The transition to net zero is poised to transform the whole economy. Industries accounting for 20% of global GDP are being reshaped, including steel, cement, automotive & other transportation, oil & gas and the energy sector, amongst others. But the most disruptive force of all is the emergence of AI as a ubiquitous enabler. In 1H23, according to Crunchbase, AI funding accounted for 18% ($25B) of global VC investment and this is set to grow dramatically.

AI is opening up a gamut of new opportunities across virtually all sectors. Dealroom says: "AI has picked up an incredible head of steam, driven by the advancement of generative AI and large language models." It is supercharging a new and faster than ever cycle of software innovation both by integrating new AI features into existing products and creating new 'AI-first' ones. But Dealroom data shows that investment into AI and associated frontier technologies is very unevenly distributed so far. From the beginning of 2022 to date, the US accounts for 65% of global AI funding, with Europe on 16% ($8.5B), and China on 8%. Even so, analysts expect a 10x growth in Generative AI VC funding across Europe in 2023 compared to 2020. For example, Mistral AI has just announced the largest seed round ever in Europe at €105M, similar in size to the $101M Series A round for London-based, Stability.AI back in October 2022. AI is beginning to power a new tech cycle and investment frenzy in Europe. Founders that have not already grasped the incredible potential must quickly take stock.

Grasping the potential of AI

AI software is likely to be the most disruptive force in technology in the coming decade. Founders that are pioneering in this area claim the impact will be "Bigger than the printing press" and "Bigger than Covid". The more you study the space the more you come to realise that these may not be such outlandish claims. The buzz kicked off by the launch of OpenAI’s ChatGPT in November not only captured the imagination of the public but put every CEO on notice that, if they didn't already have one, they needed an AI strategy. AI has become the new hot question on earnings calls for public companies, rapidly demoting ESG topics that had become such a prominent feature. And whilst the recent excitement has largely been around consumer applications, the big prize sits in the enterprise. In the not too distant future, AI assistants will become the exclusive interface to the digital world, whether at home or at work or at school, or wherever else. You won't go to Google or Wiki anymore. 'Search' as we know it will disappear. When we hear that Google is already spending $20B a year on AI, with the DeepMind salary budget alone standing at $1.2B, there is no question that huge, industry-shaping forces are at work. In fact they have been at work for many years. It is only that as we enter the early commercialisation phase of AI that those not yet exposed to this coming tsunami of change are finally sitting up. 

The latest commercialisation battle ground is how Generative AI companies position themselves in enterprise applications and create early traction. Interestingly, it is not just the big 'incumbents' that are in this race, but startups too. For example, Mistral is building its own large language models (LLMs) — the tech behind OpenAI’s ChatGPT — to serve corporate clients and help them improve their processes around R&D, customer care and marketing, as well as giving them the tools to build new products with AI. There is a host of other European startup companies building LLMs to address the enterprise space, such as Stability AI, led by flamboyant founder, Emad Mostaque, recently interviewed here. Other startups are building industry-specific LLMs and Digital Assistants for specific verticals. A great example is Nabla, an AI assistant for doctors, led by Alex Lebrun, who previously headed up engineering at Facebook AI Research (FAIR) and was recently interviewed here. Other startups are reworking the architecture of LLMs, primarily to address the data security issues within corporates. Contextual AI is a great example, led by founder Douwe Kiela, again of Facebook AI heritage and recently interviewed here. And for those seeking a helicopter view of the world of AI and what is in store over the next 5 years, then Yann LeCun, Chief AI Scientist at META is a key person to follow, recently interviewed here.

What does all this mean for UK startups yet to officially jump on the AI bandwagon? From a VC perspective, AI is becoming the FOMO event to trump all others. But be aware, there is already a slew of new startups, many led by AI pioneers that have left the likes of META/Facebook and Google to exploit the new revolution. In the UK, investors are inundated with AI startups, one claiming to have seen 50 propositions over the past couple of months alone. The founding team is thus a massive assessment factor as some raising big sums are doing so without even an MVP. And it's not just VCs that are writing big cheques but the venture arms of many corporates. The likes of Nvidia, Microsoft, Google, Intel, and Salesforce are already investing huge sums via their CVC teams. UK AI startups may have a particular advantage versus their EU counterparts due to pending regulation. In June, European VCs and tech firms signed an open letter to the EU warning against over-regulation of AI in draft EU laws now under consultation. Amongst other concerns, these proposals state that AI firms must be accountable for all data that trains their models. "A beautiful idea but not connected to reality" says Lebrun at Nabla. Italy has already gone further and banned the use of ChatGPT. For UK startups, especially those addressing large 'traditional' markets that have thus far been more resistant to tech disruption, such as Real Estate, Education, Insurance, Travel and Fashion to name but a few, there is now a rare window of opportunity.

Happy reading!

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