Artificial intelligence startups face rough financial reality check

By Cade Metz, Karen Weise & Tripp Mickle

Call it the end of the beginning of the AI boom.

Since mid-March, the financial pressure on several signature artificial intelligence startups has taken a toll. Inflection AI, which raised $1.5 billion but made almost no money, has folded its original business. Stability AI has laid off employees and parted ways with its chief executive. And Anthropic has raced to close the roughly $1.8 billion gap between its modest sales and enormous expenses.

The AI revolution, is going to come with a very big price tag. And the tech companies that have bet their futures on it are scrambling to figure out how to close the gap between those expenses and the profits they hope to make somewhere down the line. This problem is particularly acute for a group of high-profile startups that have raised tens of billions of dollars for the development of generative AI, the technology behind chatbots such as ChatGPT. Some of them are already figuring out that competing head-on with giants like Google, Microsoft and Meta is going to take billions of dollars — and even that may not be enough.

 

“You can already see the writing on the wall,” said Ali Ghodsi, chief executive of Databricks, a data warehouse and analysis company that works with AI startups. “It doesn’t matter how cool it is what you do — does it have business viability?”

While plenty of money has been burned in other tech booms, the expense of building AI systems has shocked tech industry veterans. Unlike the iPhone, which kicked off the last technology transition and cost a few hundred million dollars to develop because it largely relied on existing components, generative AI models cost billions to create and maintain. The cutting-edge chips they need are expensive and in short supply. And every query of an AI system costs far more than a simple Google search.

Investors have poured $330 billion into about 26,000 AI and machine-learning startups over the past three years, according to PitchBook. That’s two-thirds more than the amount they spent funding 20,350 AI companies from 2018 through 2020. The challenges hitting newer AI companies stand in contrast to the early business results at OpenAI, which is backed by $13 billion from Microsoft. The attention it has generated with its ChatGPT system has allowed the company to build a business charging $20 a month for its premium chatbot and offered a way for businesses to build their AI services with the technology that drives its chatbot.

TECH HURDLE

- This problem is acute for a group of high-profile startups that have raised tens of billions of dollars for the development of generative AI

- Inflection AI, which raised $1.5 billion but made almost no money, has folded its original business

- Stability AI has laid off employees and parted ways with its chief executive

- Anthropic has raced to close the roughly $1.8 billion gap between its modest sales and enormous expenses

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