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Artificial Intelligence Growth at an Inflection Point

Business technology investment no longer follows a predictable path to growth. The global venture capital (VC) investment in artificial intelligence (AI) was close to its peak in 2021 reaching $22.3 billion, according to the latest worldwide market study by ABI Research.

This is just $400 million shy of the historical high of $22.7 billion recorded in 2019. Compared to the $15 billion recorded in 2020, the market made a remarkable recovery, with a 48.5 percent year-on-year growth. Will the future AI marketplace return to stable growth, or will it remain volatile?

Artificial Intelligence Market Development

"COVID-19 greatly accelerated the speed of digital transformation within the enterprise. Businesses are looking for solutions to work processes automation, customer care, due diligence, transcription and translation, and sales and marketing enablement tools," said Lian Jye Su, research director at ABI Research.

At the same time, COVID-19 led to the Great Resignation of 2021, where over 47 million Americans voluntarily quit their jobs. The massive job-changing wave led businesses to rethink their internal business processes, redeploy employees for high-value tasks, and retain valuable institutional knowledge.

"It's no surprise that startups led the funding in 2021," Su says.

These include UiPath and WorkFusion in enterprise automation, 4Paradigm, Databricks, Dataiku, DataRobot, and H2O.ai in data science and AI development platforms, and AI chipset vendors like SambaNova Systems, Groq, ECARX, Horizon Robotics, Enflame, and Hailo.

"In essence, businesses need to identify their AI strategies, whether to buy, build, or both. Businesses looking to buy their AI solutions will look to UiPath and WorkFusion; those looking to build their own custom AI will lean toward the data science and AI development platforms," explains Su.

In some cases, having the right AI solution is not enough. Business and technology leaders are also looking for the most optimal AI hardware, and this is where AI chipset startups come into play.

While the strong rebound indicated bullish market sentiment on the prospect of AI as a disruptive technology, the rebound is even more impressive considering the VC market exit of well-known startups taken into account.

In 2021, no less than eight significant startups exited the VC market, including Affirm, Babylon, Darktrace, Exscientia, Recursion, SenseTime, SentinelOne, and UiPath.

According to the ABI assessment, these startups have a strong value proposition, clear core competencies, and sustainable business models. With the exit of these startups, however, the total VC funding for AI in future years may see lower, or even negative, growth.

Outlook for AI Applications Investment Growth

"These startups have demonstrated the full potential of AI to businesses. They also serve as examples for the younger AI startups. While the AI market is getting more crowded, it is still essential for aspiring startups to hone their value proposition, identify the right niche, develop core competency, and well serve customers," concludes Su.

That said, I anticipate an upcoming market correction that will cause a much-needed "reality check" for AI vendors that have failed to gain momentum by clearly articulating a compelling value proposition that results in new customers and revenue growth.

Moreover, startups that apply typical AI product-market fit assessments to attain VC funding will find it difficult to convince potential investors that they have a credible upside opportunity. The era of AI early adopter-led growth has been nearing maturity for some time. We appear to have arrived at an inflection point where rigorous due diligence will reduce the risk of investor regret.

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