Last week we witnessed two major players in the AI startup ecosystem, Inflection AI and Stability AI, both sitting on millions of dollars of funding, lose their founders and core teams. One jumped to the bigger ship, while the other abandoned it. 

It is probable that we will continue to witness similar occurrences, with AI startups finding themselves vulnerable to the dominance of major tech corporations. 

Source: X

The Big Picture

The ambitious AI startup buzz is on the rise, but the craze might have lost some of its lustre. The generative AI market size is poised to grow from $44 billion in 2023 to $668 billion by 2030, and with the surge of generative AI startups, the exit strategy for these companies will become crucial. 

The compute, manpower and resources required to run an AI model easily runs into millions, which can prove to be the biggest drawback for a generative AI startup. It thus becomes essential for the companies to raise gigantic fundings, and who better to support than the big tech companies.

The immense competition in the generative AI startup space only adds to the problem. The recent revenue figures of Cohere have proven how competing against OpenAI is no easy feat. “I feel like we are funding AI startups like there will be 10-20 winners per category,” said Jason Lemkin, SaaS founder and VC. 

Big Tech Custodians

In the recent Inflection AI fiasco, two of its three founders, including Mustafa Suleyman, quit the company to join Microsoft to lead its AI function. Along with him, many employees from the startup moved to the tech giant. Interestingly, Microsoft agreed to pay Inflection $650 million while hiring its staff. 

Ironically, Microsoft was one of the biggest investors of Inflection. 

Microsoft, which we know as the biggest force to reckon with in the AI world backing a number of promising startups, looks like the ultimate winner. Furthermore, the partnership with OpenAI, Mistral and other startups only fortifies the capabilities of Microsoft Azure services. 

A number of enterprises and SaaS players, including Zoho Corporation, are availing OpenAI services via Microsoft Azure. 

It was recently rumoured that Satya Nadella told his board members that if OpenAI ‘disappears tomorrow’, they’ll have all the IP rights and capabilities. “We have the people, we have the compute, we have the data, and we have everything,” quoted a leaked document.   

If the leaked document is true, the big tech company’s predatory vision to freely acquire its goose that lays the golden egg, will come to fruition – a big win for the big tech. 

Similarly, the next hottest AI startup, Anthropic, has been shielded by the next best contender to Microsoft: Amazon. The big tech company has invested $4 billion in Anthropic and is aggressively marketing its AI models across platforms. It is even being offered to Amazon customers via Amazon Bedrock. 

It is obvious then that the fate of the startup is in the safe hands of the big tech – a predictable outcome. 

AI Researchers, Not Businessmen

Author and entrepreneur Carlos E Perez observed that the issue in AI startup companies is with their founders. “A huge issue with many recent AI startup companies is that their founders are predominantly academic researchers who have never built products. It’s likely that they have no interest in developing products, instead only seek scientific discovery,” said Perez. 

Their interests are thus unaligned with that of the investors. 

The thinking and growth-focus capabilities of academic researchers cannot be equated to those who have developed and grown companies. Even if they do start their venture, they can abandon it. “The researchers just got bored and decided that Microsoft would be more conducive to doing research in?” said Perez.  

Source: X

AI Startups Remain Crucial

While it seems obvious at this point that the endgame for all GenAI startups lies with the big tech companies, their current role of innovation cannot be substituted by them. 

“I think it’s going to be very hard for incumbents to respond with the same speed and bring the same kind of innovation to the market that founders can. Every part of the market is going to be disrupted and every incumbent is at risk, irrespective of how quickly they might have jumped on this first iteration of AI,” said Guru Chahal, partner at Lightspeed Ventures, at NVIDIA GTC 2024. 

While the fate of these AI startups in the long run is riddled with uncertainty, until then, perhaps we can have a laugh at their expense.

Source: X