AI startups are becoming the gold rush of 2023.
It’s no secret that venture capital (VC) is pouring money into artificial intelligence (AI). Its mainstream prominence and funding environment are rivaling that of blockchain in 2021. Hundreds of startups are implementing AI into their business models, VC Twitter is packed with ChatGPT and AI posts, and AI is the №1 startup funding area going into 2023.
These funding trends create a funding environment that incentivizes implementing AI features into startups. It creates an interesting phenomenon where VCs are more inclined to invest and invest more if they fall into these categories. Then more startups will fall under these trend categories, which typically result in speculative bubbles. Nonetheless, billions of dollars are still made in the process.
During the crypto era, early investors in Bitcoin or Shiba Inu became billionaires seemingly overnight. Coinbase Global Inc. went through Y Combinator in 2012 and had a standard deal averaging $17,000 for 7% plus a simple agreement for future equity (SAFE) that converted at terms of the next money raised for $80,000.
Following Y Combinator, Coinbase raised a Series A round at 20 cents per share, meaning if Y Combinator used the standard deal on Coinbase, it owned 7% of the company and 400,000 shares of the company from the subsequent investment. While that 7% is diluted over time, Coinbase opened at a valuation of over $100 billion and $381 per share the day of its initial public offering (IPO), so Y Combinator made hundreds of millions — if not billions — from the Coinbase IPO.
It’s investments like these that have given Y Combinator the legendary name it has today. Looking at Y Combinator’s first 2023 batch as it’s released so far (and expected to grow), 51 of the growing 183 are AI startups, 32 of which classify themselves as generative AI.
This creates an obvious incentive for companies to implement or even focus on AI in their business model because it’s what VCs believe is the future. There are plenty of other great, and potentially even more practical and profitable ideas, but if you can’t get the funding you need, you might be dead in the water.
So the next time you wonder where these trends come from and why they continue to grow in prominence, it’s likely because of where VCs are putting their money.