The scale of the investment in generative AI companies — much of it going to three San Francisco startups — is raising eyebrows for its size, speed and risk
The venture-capital industry has seen plenty of hype-driven investment cycles before, but the generative artificial intelligence craze might top them all.
Rapid adoption, along with the technology’s capabilities and promise, lured in investors. Microsoft committed a whopping $10 billion — the second-biggest venture-funding round in history — to OpenAI in January 2023. And that was just the start. That collective haul by the three generative-AI giants over the last 22 months includes five of the nine largest funding rounds ever raised by U.S. startups, according to PitchBook. Among those top rounds: the $6.6 billion one OpenAI closed earlier this month and the $6 billion one xAI closed in June.
OpenAI reportedly expects to lose at least $5 billion this year, not including certain expenses such as stock-based compensation. It expects those losses to hit $14 billion in 2026 and to reach a cumulative $44 billion for the entire period between 2023 and 2028, tech-news website The Information recently reported.
“Certainly, we’re looking at something that’s very rare,” said Robert Hendershott, an associate professor of finance at Santa Clara University’s Leavey School of Business. “If it’s not unique, it’s very rare.” OpenAI took over space from Uber in Mission Bay last year and has recently expanded there, while xAI recently moved into OpenAI’s former space in the Mission. Anthropic signed a big lease in SoMa last year.
Public-private vision for $30 million Embarcadero Plaza overhaul advances A $30 million-plus plan to upgrade underused Embarcadero Plaza got a boost with parks commission backing for a design and fundraising deal The venture-capital industry model assumes that many investments will fail. Firms bank on having one investment in every 10 pay off in a big way — 10 or more times what they put into it — to make up for the losses on their other investments.
Part of the difficulty the generative AI startups face is that there’s intense competition — and not just from each other or other startups. Tech behemoths Meta, Google and Microsoft are all investing heavily in developing their own generative AI systems, as are Apple and Salesforce. And Nvidia’s continued dominance of the AI chip market, its ability to charge premium prices for those chips, and the creation of ever-larger models that rely on ever more AI chips suggest costs may not come down anytime soon, Covello said.
Despite such risks and the scale of the generative-AI bet, some venture experts cite reasons to be bullish. Siegel said he consults with companies around the world, and every company he’s meeting with is talking about and using AI.
Artificial Intelligence Generative Ai Venture Capital Startups Openai Anthropic Xai
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