Generative AI startups get 40% of all VC investment in cloud amid ChatGPT buzz

• Venture funding for cloud startups in the U.S., Europe and Israel this year is projected to rise 27% year-over-year, increasing for the first time in three years, according to a report from VC firm Accel.
• Out of the $79.2 billion total raised by cloud firms, 40% of all funding went to generative AI startups, Accel said.
• "AI is sucking the air out of the room" when it comes to cloud, Philippe Botteri, partner at Accel, told CNBC an interview this week.

Generative artificial intelligence startups are getting 40% of all the venture capital funding that flows into cloud companies, according to venture investors Accel.

In its latest annual Euroscape report, which looks at key cloud and AI trends, Accel said that venture funding for cloud startups based in the U.S., Europe and Israel is projected to rise to $79.2 billion this year, with artificial intelligence fueling much of the recovery.

Venture funding into the cloud industry climbed 27% annually — marking the first year of growth in three years. Cloud startups raised $62.5 billion in Europe, Israel and the U.S. in 2023, the report found.

Funding is up 65% from the $47.9 billion cloud firms raised four years ago, according to Accel.

It comes after OpenAI, the Microsoft-backed company behind the buzzy generative AI chatbot ChatGPT, earlier this month raised $6.6 billion in a mammoth funding round that valued the startup at $157 billion.

AI is eating software

Much of the growth of funding in cloud is being driven by excitement around AI.

"AI is sucking the air out of the room" when it comes to cloud, Philippe Botteri, partner at Accel, told CNBC in an interview this week. "This is both visible on the public market and and the private market."

As of Sep. 30, the Euroscape index — a selection of publicly-listed U.S., European and Israeli cloud firms curated by Accel — is up 19% year-over-year.

This pales in comparison with the 38% increase the Nasdaq saw this year and is also down 39% from the Euroscape index's peak hit back in 2021.

The cloud industry has been having a tough time beyond AI, with enterprise software budgets squeezed by macroeconomic and geopolitical risks.

"There's a lot of uncertainty out there," Botteri said, adding that businesses are increasingly asking questions around geopolitical tensions and macroeconomic factors, which have affected software spending priorities.

Not a single company in Accel's Euroscape index has seen revenue growth of more than 40% per year this year, compared with 23 businesses achieving the feat in 2021.

"IT budgets are shifting towards AI," Botteri noted. "They are still growing slightly, but they are growing a few percent year-over-year."

"Part of it is budgets going toward genAI, building new applications, testing these new technologies, so there is less for the rest," the VC investor added.

Foundational models in focus

The top six generative AI companies in the U.S., Europe and Israel, respectively, accounted for roughly two thirds of the funding raised by all genAI startups, according to Accel's Euroscape report.

OpenAI raised a dominant $18.9 billion in 2023-24, taking the lion's share of VC funding that went to U.S. genAI companies.

"When you look OpenAI and the speed at which the road to over $3 billion in revenues, this has been one of the fastest companies in software of all time," said Botteri.

Anthropic raised the second-largest sum among U.S. genAI startups, with $7.8 billion, while Elon Musk's xAI came in third.

In Europe, the biggest funding amounts went to Britain's Wayve, France's Mistral and Germany's Aleph Alpha.

Globally, companies building so-called foundational models, which power much of today's generative AI tools, account for two thirds of overall funding for generative AI firms, Accel said.

Big Tech's AI splurge

The U.S. took the lead globally in terms of overall regional generative AI investment raised.

Out of the $56 billion total siphoned into genAI firms globally over 2023-24, roughly 80% of the cash went to U.S.-based firms, Accel said, also noting that Amazon, Microsoft, Google and Meta are each investing an eye-watering average $30 billion to $60 billion in AI per year.

AI "majors" like OpenAI, Anthropic and xAI are spending billions on the technology, Accel said, while smaller challengers including Cohere, H and Mistral are investing tens to hundreds of millions per year. 

Dev Ittycheria, CEO of database firm MongoDB, noted that it's likely concentration of the most powerful AI models will consolidate to only a select few players that are able to attract the necessary capital to make investments in data centers and chips to train and run their systems.

"Access to capital will profoundly impact the performance of these models," Ittycheria said in an interview Tuesday on CNBC's "Squawk Box." He added: "My bet is that over time, you won't have this many model providers, you may come down to one or two."