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In this week’s data… AI may be in a bubble, Europe can’t match Silicon Valley investments, and VCs are still driving AI growth.

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AI Startups of Europe

Artificial Intelligence has been all the hype for recent startups. In 2023 the share of investment capital focused on AI increased from 16% to over 20.5% and with it, followed 1,157 new AI focused startups.

With billions of dollars invested in these AI startups, many of which are currently very unprofitable, the question remains if this is another .com bubble, or if AI tech is here to stay.

Here’s what we have this week:

▪ AI Startup Growth 🚀

▪ Stablility AI CEO Feature ✨

▪ European AI Investments 🇪🇺

▪ VC Cash Funds AI Growth 🌱

Last week we presented the key insights on emerging startup hubs. Missed our startup hub write-up? Catch up here

Startup Insights

AI Startup Growth 🚀

The last year has seen a significant leap in European AI investment. The AI & Software sector secured $9.7 billion in funding for 2023, representing 20.5% of the total startup funding market for Europe. Leading the charge, Mistral AI and Aleph Alpha collectively raised $915 million.

With a surge of AI investments there has been a record of new startups in this sector, totalling over 1,157 AI startups for 2023, and for this year this will likely also include a fair share of unprofitable failures.

Key Insights

> Unprofitable: With a great deal of news, interest and capital follows a great deal of FOMO. Are there 1,157 profitable uses of AI for Europe?

> VC/EIF Investment Shift: The new phase of AI investment in Europe emphasizes strategic, ROI-focused applications over foundational AI models

> Regulation Wildfire: Following the EU AI Act several governments are introducing regulations on the market - all with a great deal of uncertainty

Featured Startup Digest

Is Stable Diffusion A Billion Dollar AI Failure?

“I think this will be the biggest bubble of all time” are the words of Emad Mostaque, the CEO of open-source Stability AI valued at over a billion dollars.

Stability AI was founded in 2019 and has risen as one of the leading AI startups following their launch of Stable Diffusion, an AI platform that generates photo-realistic images through text. The startup has over one million active users and has attracted over $100 million in startup investment.

Despite the many AI success stories Emad believes that a significant number of AI focused ventures will fail as a result of not being ready for mass-scale adoption calling it the ‘dot AI bubble’. However, he also notes that AI “will be one of the biggest investment themese over the next few years”.

The disruptive change of AI may be here to stay, but many of the current AI startups are simply moving faster than the market can adopt for.

Europe vs US Artificial Intelligence 🇪🇺

European investment in AI startups ($5.8 billion) still only represents one fifth of the US AI funding ($26.3 billion). More than one in four dollars invested in American startups in 2023 has gone to an AI-related company.

Europe's approach to AI has been more cautious largely due to regulatory uncertainities when compared to the US's aggressive funding strategies, with major tech giants like Amazon and Microsoft backing Silicon Valley startups heavily.

Key Insights

> Divergent Funding Strategies: The US's larger private sector investments suggest a more aggressive, high-risk-high-reward approach.

> Specialized Focus: European AI startups are increasingly concentrating on solving specific industry challenges in health, sustainability & consulting.

> Regulatory and Market Dynamics: Europe's data protection laws and regulations present challenges for AI startups that might impede scaling.

Recent Startup News

• German Academic Communication Innovation– Morressier, a German startup, obtained $16.5 million in Series B funding, aiming to transform scholarly communications.​
   

• Spanish AI Unicorn's Funding Success – TravelPerk, a Spanish AI software unicorn, raised $104 million in funding to enhance corporate travel solutions.
   

• Danish EV Infrastructure Boost –  Monta, a Denmark-based electric vehicle charging platform, secured €80 million in Series B funding.
   

• Innovative Arctic Solution– A UK startup, Real Ice, backed by the UN, proposes a novel approach to refreeze the Arctic, although it faces the challenge of securing sufficient capital for this ambitious project.

VC Cash Funds AI Growth 🌱

For 2024 the European AI startup sector will likely continue to experience growth due to the substantial cash reserves in venture capital.

With VC firms and growth funds holding a combined total of nearly $108 billion in cash, a 14% rise from the previous year, there's a pressing need for these funds to be allocated. With limited investment opportunities and a continued interest in AI, this will be a key driver for increasing valuations.

Key Insights

> VC Backup: With a 14% increase in available capital from the previous year, VC firms are poised to actively seek investment opportunities in AI

> Investment vs. Profitability: The massive increase in AI startups raises questions about the sustainable profitability of these ventures.

> AI Market Growth: The European AI market is expected to grow at a 25.5% CAGR from 2023-2026, reaching $191 billion by 2026.

SearchVentures Insights

With double-digit growth, record valuations and as a leading disruptor in tech these AI startups are too good on paper to pass up for investors. However, without mass scale adoption or a clear runway to profitability, they rely heavily on investor capital.

With $108 billion of unallocated startup funds, this may not be a major issue for 2024, but will likely be a long-term challenge for investors looking for a return on large speculative AI bets.

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See you next week

Cheers,

Odin Lund & Hariprasad Mohandas