Venture capitalists injected $58.3 billion into AI startups in 2023, as per Dealroom data, reflecting the continued interest in artificial intelligence technologies despite a broader decline in venture capital investment. European AI startups, including notable names like Mistral, Aleph Alpha, and ElevenLabs, garnered substantial funding rounds in 2023, capturing the attention of prominent investors. As 2024 approaches, investors predict significant shifts in the European AI sector. This article delves into the anticipated changes and trends that could reshape the landscape of AI startups in Europe next year.
Vertical focus on industry-specific problems
One of the prominent expectations for 2024 is a shift towards AI startups that specialize in addressing industry-specific challenges. According to Andreas Riegler, a general partner at Apex Ventures, startups focusing on sectors such as healthcare, finance, and manufacturing, where AI can deliver substantial value, will gain more attention. While horizontal AI startups offering a wide range of use cases have been in the spotlight, they often require vast datasets for training, and upcoming European regulations could threaten the current data landscape.
Already, specialized startups are emerging across various sectors, such as AI biotech company Cradle, property tech firm Orbital Witness, and synthetic data startup Aindo. These companies are tackling problems like weather forecasting, transportation, logistics, communications, and biotechnology. This shift towards solving specific industry challenges reflects a maturation of the AI startup ecosystem.
Foundational funding on the decline
In contrast to the frenzy surrounding foundational models in 2023, investors expect a decline in foundational funding for AI startups in 2024. Foundational models, often trained on massive datasets and designed for general purposes, drew significant attention and investments in the past year, exemplified by OpenAI’s $10 billion fundraising round in January. However, sustaining such funding levels is challenging, and not many investors can write the substantial checks required by these companies.
Imran Ghory, a partner at Blossom Capital, noted that it remains incredibly expensive to develop such models, and the pool of investors capable of providing the necessary funding may shrink. Additionally, many foundational model startups relied on sovereign wealth funds for large financing rounds, but political sensitivities around AI models could limit these funding sources. As a result, a more cautious approach to foundational funding is expected in 2024.
Shift towards ethical AI
The European Union’s recent announcement of the AI Act, a policy aimed at regulating AI technologies, could usher in a more regulated AI ecosystem. While this move has sparked debates about stifling innovation, it also highlights the growing importance of ethical considerations in AI development. Startups that proactively address compliance issues and stay ahead of regulatory changes will likely become more appealing to investors.
Furthermore, discussions about AI safety and ethics have gained prominence. The short-lived ouster of Sam Altman from OpenAI speculated to be partly related to his attitude towards AI safety, underscored the importance of responsible AI development. AI ethics and responsible AI have already entered the legal arena, with companies like Stability AI and Midjourney facing legal challenges for alleged copyright violations. With tightening European regulations and increasing global awareness of deepfakes and misinformation, ethical considerations will be more significant in AI startup investments in 2024.
Rise in demand for open-source AI
As AI regulation becomes more stringent, particularly for large language models (LLMs) used in business-to-business applications, there is a notable shift from closed-source to open-source AI models. This shift is driven by the need to adhere to strict privacy and regulatory standards.
Big Tech giants like Meta and IBM have been promoting open-source development as the next frontier in AI. Investors also see open source as an attractive model for accelerating the adoption of AI. With open-source AI, enterprises gain transparency and control over their models, addressing data privacy, security, and governance challenges.
Maxime Corbani, a senior associate at Runa Capital, highlighted that companies increasingly rely on open-source AI technologies to navigate the evolving regulatory landscape. This shift towards open source aligns with the intention to provide transparency and standardized approaches to AI, empowering companies to take control of their AI initiatives.
In 2024, European AI startups are expected to undergo significant changes driven by several key trends. The focus on solving industry-specific problems, a decline in foundational funding, an increased emphasis on ethical AI, and the rise of open-source AI models are all anticipated developments that will shape the AI startup ecosystem in Europe. As the sector matures and regulatory pressures mount, startups that adapt to these changes and prioritize responsible AI development may find themselves more attractive to investors in the evolving landscape of artificial intelligence.