Picking the generative AI winners

Clearly, investors think generative AI has lots of potential. According to PitchBook, valuations for early-stage generative AI companies jumped by 16 percent in the first four months of the year, while prices for all other early-stage startups dropped by nearly 24 percent.¹ Five new unicorns were minted in the first four months of the year, all of them AI startups. OpenAI, the startup that brought us ChatGPT, is now thought to be worth nearly $30 billion.

The excitement surrounding generative AI is understandable. Data from a recent KPMG survey finds that nearly two-thirds of US executives think generative AI will have a high or extremely high impact on their organization in the next three to five years. Seventy-seven percent say it will have a bigger impact on broader society than any other emerging technology currently in existence. According to market research firm CB Insights, corporate venture capital investment into AI startups rose by around 37 percent in the first quarter of the year.²

Traditional investment firms have also been ramping up their investments. Almost every day, we hear about investors pouring new money into AI startups.

Buying the bot

In part, the rush towards generative AI is driven by fear of missing out (FOMO). Traditional investors don’t want to miss out on the next big growth opportunity. But much of the activity has also been strategic. Tech companies want to emulate what Microsoft got from its seemingly prescient investment into OpenAI. For many corporates, the main goal is to accelerate their own internal R&D by investing in companies further along in product development that, if successful, could ultimately be acquired.

The challenge, therefore, is to put aside the pressure of FOMO to focus on finding those companies and technologies that will deliver meaningful value for investors and users. There is a lot of hype and self-promotion going on these days. Sifting through it all to find the next big growth company or killer technology isn’t easy. 

How to generate value

My view suggests investors will be looking for two big things when assessing generative AI investments. The first is whether the company or tool can demonstrate a path to profitability. Over the past few months, those generative AI companies with business-ready tools and solutions have often attracted the most interest and achieved the highest valuations.

The second thing investors want to see is that technologies and tools are being developed, trained, operated, and maintained responsibly. This isn’t just about managing long-term risks related to privacy, reputation, or regulation. It’s about helping encourage adoption and uptake in a world where consumers and users remain uncertain about the safety and security of AI.

It’s going to be an exciting ride

As I noted in the most recent edition of Venture Pulse, a KPMG Private Enterprise publication, I believe generative AI will continue to be a hugely exciting space for investors. And as more and more companies launch with various offerings, I would expect to see continued high levels of investment in the space.

One thing is certain—for those private companies with a great generative AI story to tell (and their investors), the next few months will be very exciting indeed. 

^{1, 2} Venture Pulse Q1 2023, Global Analysis of Venture Funding, KPMG Private Enterprise. Data provided by PitchBook, April 19, 2023.