The COVID era was a dark time for most, but a prosperous time for startups as funding and valuations reached record-breaking levels. This bull market, however, ended in 2022 as rising interest rates and fears of a looming recession caused investors to pull back, leaving startups scrambling to raise capital at lower valuations. Several factors including inflation, the war in Ukraine, rising interest rates and worries of a recession meant many investors were hesitant to deploy capital. This meant startups looking to raise capital to extend their runway would have fewer options available to them. Startups that were able to raise capital did so at a steep discount. For most of the year, investors were cautious and adopted a wait-and-see approach. Venture Capitalists (VCs) were sitting on $290B of capital that had yet to be deployed, and they were searching for the next big idea that would revolutionize the world. They would find their answer in November, when the world was introduced to ChatGPT.
What is ChatGPT?
ChatGPT is a chatbot developed by OpenAI, a leading Artificial Intelligence (AI) company whose founders include Elon Musk. It is built on GPT-3, the third iteration of a language model that has been trained on vast amounts of text data, web pages, books and articles. The model has been trained using 175 billion parameters and 45 terabytes of data.
ChatGPT is an example of Generative AI, meaning it can create new content based on existing data. For the first time, the world was witnessing a chatbot write entire news articles, blog posts, and books. Additionally, it can converse with you and answer questions in a way not seen before. It can even write code, demonstrating the potential use of the technology.
The public reception to ChatGPT was very positive, with users flocking to sign up. Within the first two months of its launch, it reached 100 million users, making it the fastest growing app ever. To put this into perspective, it took TikTok 9 months and Instagram more than two years to reach the same milestone.
The AI Wars
As ChatGPT continued to dazzle the world, it became clear that we were entering a new era of AI. Bill Gates acknowledged its impact, stating: “This will change our world”.
Microsoft, which was founded by Bill Gates in 1975, was an early investor in OpenAI. The company invested $1B in cash and cloud credits in 2019. In 2023, they followed up with a $10B investment, valuing the company at $29B. In response, Google issued a ‘code red’ within weeks, internally as it became increasingly clear that Microsoft would incorporate this powerful technology into its search and cloud products.
Earlier this month, Microsoft held a press conference to introduce their GPT-enabled Bing search engine and Edge browser. Interestingly, the event was scheduled one day before a similar event held by Google, where they revealed Bard as their answer to ChatGPT. Google’s event was met with mixed reviews, and was followed shortly by a blunder that would wipe billions from their market cap. It has since been revealed that Microsoft’s demonstration also contained mistakes.
The frantic pace demonstrates the importance the two companies place on AI. Microsoft has now positioned itself to gain a bigger share of Google’s search market, a position they never held before. Before the advent of ChatGPT, this was thought to be impossible.
Google currently dominates the search business with nearly 93%, whereas Bing holds just over 3%. With the integration of GPT into Bing, Microsoft is positioned to attract more users, making it a win-win for the company. Google, on the other hand, must defend their position vigorously, a challenge that Microsoft’s CEO seems to relish. According to Microsoft’s CFO, each percentage point of search advertising market share amounts to a staggering $2 billion in annual revenue, which explains why Google has been reacting so strongly to Microsoft’s moves. Meanwhile, Google has also made moves to counter Microsoft’s advances by investing in Anthropic, another competitor to ChatGPT.
In an ironic turn of events, Google played a crucial role in the creation of ChatGPT. This is because the Transformer, the ‘T’ in ChatGPT, was developed by Google Research. The Transformer was introduced in a whitepaper that described a neural network architecture capable of understanding and producing language that closely resembles human language. Without this breakthrough by Google, ChatGPT as we know it today would not have been possible.
VCs Are Taking Note
With $290 billion of dry powder waiting to be deployed, VCs are likely to turn their attention to Generative AI startups. This sector saw an increase in funding, reaching $1.14 billion in 2021 and $1.37 billion in 2022. The commercial launch of ChatGPT is expected to usher in a new era of startups that integrate human-like language into their products and services. Given the growing buzz around Generative AI, VCs are likely to pour large amounts of cash into this area, potentially creating a new investment bubble similar to the one seen in crypto. In the past, VCs have been quick to fund companies like Celsius and FTX, giving them large amounts of capital with minimal due diligence. The two are among a string of companies which have since declared bankruptcy, with both CEO’s facing criminal charges.
With the AI gold rush gaining momentum, there will be no shortage of startups vying for VC investment. However, given that Generative AI is still in its infancy, some experts caution against moving too fast. Perhaps this is one area where the “move fast and break things” philosophy startups typically adopt might not be the best strategy.
“It wasn’t just programmable, it was reprogrammable.” -Alan Turing, The Imitation Game (2014)