Venture Bytes #93 - Generative AI Cranks Up the innovation Engine in the Valley

Generative AI holds the promise to be a truly transformative technology, in the technologies. While the high computing and inference costs of large language models – the models that underpin services such as ChatGPT – have been a drag, OpenAI’s 90% price cut for its APIs could democratize the technology and foster faster generative AI adoption.

With trillions of dollars in economic potential, the technology is offering a wealth of opportunities for investors looking to ride the next generation of AI growth. At the heart of this trend is a growing ecosystem around three layers – hardware layer, foundation infrastructure and large language models layer, and application layer – all of which are working together to create new and more powerful AI systems.

Potential Winners Across Layers

The inception of a tech stack in generative AI is in its early phase with a variety of start-ups and established tech giants across all three layers entering the market. These areas will see sweeping transformations in the coming year owing to the growth and influence of large linguistic models.

At the hardware layer, the AI boom could benefit companies like Nvidia, AMD, and Cerebras, which specialize in cutting-edge graphics processors used for training and deploying AI models. Bank of America Global Research predicts that the surge in generative AI, such as chatbots and image creation services, could boost Nvidia’s revenue by $14 billion by 2027. However, building chips is capital intensive where power would be concentrated in the hands of a few already established players

“We believe that large language models are underhyped and that we are just beginning to see the impact of them,” – Andrew Feldman, Cerebras co-founder, and CEO.

At the foundation model layer, OpenAI is a clear frontrunner. The company received $10 billion from Microsoft and has been a pioneer in developing some of the most sophisticated generative AI models. Additionally, companies like Stability AI and Cohere could also emerge as potential winners going forward.

The application layer is where the action is in the world of AI, and it’s also the most crowded. According to NfX, there are now over 500 generative AI companies, with a new company launching almost every week. These companies have collectively raised more than $21 billion in just the first two months of 2023, surpassing the total funding raised in the entire year of 2022. A significant portion of the funding has gone to end-to-end companies using proprietary models such as OpenAI, Anthropic, Inflection AI, Adept, and Deep Mind. Google-backed Anthropic, for example, has raised a staggering $600 million in just two consecutive funding rounds. This investment makes sense, as these companies require capital-intensive proprietary LLMs to operate.

Even companies that don’t have proprietary models but utilize generative AI models have strong deal flow and VC interest. Many companies are trying to replicate the success of ChatGPT by building chatbots and have received significant attention from VCs. Promising companies in this category include Lavender in New York, HyperWrite and Cohere, Andi in Miami, Contenda in Philadelphia, Mutiny, Olive AI, Copysmith, and Perplexity AI in San Francisco. Additionally, companies like Runway, Figma, Photoroom and Mutable AI have shown impressive growth and potential and could be among the winners in the application layer of generative AI.

OpenAI’s Massive Advantage

OpenAI recently announced that it has achieved a 90% cost reduction in ChatGPT and Whisper APIs since December 2022 through systemwide optimizations. OpenAI has released a new model, called GPT-3.5-turbo, which is priced at $0.002 per 1,000 tokens - a significant reduction of ten times compared to existing GPT-3.5 models. The model is claimed to be the top-performing model not only in chat applications but also across other domains. The company already has customers such as Snap, Instacart, and Shopify that use APIs from OpenAI for various services.

The cost reduction is a significant step towards democratizing generative AI by offering developers reduced costs and positioning OpenAI as a development platform. To that end, the company is planning to launch Foundry, its developer platform that allows for larger workloads and scale inference. Foundry’s static allocation feature will benefit large enterprises by giving clients control over their compute units, leading to cost-effective solutions. Just as the internet and smartphones enabled companies such as Uber and Facebook, OpenAI could become the foundation for new services by acting as an “AI operating system.”

Large Language Models are Still in Infancy

Despite the significant advancements in natural language processing, large language models (LLMs) are still in their infancy. For instance, GPT-3.5 has 3 variants with 1.3B, 6B, and 175B parameters, respectively. As computational power increases over time, the parameters can go as high as 2 trillion. Google’s LaMDA, another prominent model, is trained on 137 billion parameters and with 1.56 trillion publicly available words, dialogue data, and documents on the internet. Google’s newly launched model PaLM is trained on 540 billion parameters and could fuel new AI developments in 2023.

Although these models have shown impressive performance at various tasks, including language generation, translation, and question-answering, they still face significant limitations in terms of their ability to comprehend and reason about the world in a nuanced and sophisticated way. This is due, in part, to the fact that LLMs are primarily trained on large datasets using a supervised learning approach, which often leads to overfitting and a lack of generalization to new and diverse contexts. Thus, while LLMs have made significant strides in recent years, there is still much work to be done to improve their capabilities and ensure that they are truly capable of understanding and interacting with humans naturally and intuitively.**

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The rise in acute food insecurity worldwide, driven by climate change, the Russia-Ukraine war, supply chain bottlenecks, and inflation, has reached alarming levels, with 345 million people currently affected, up from 135 million in 2019, per data from World Economic Forum. According to the Geneva-based organization’s global hunger map, 17 countries have very high (>40%) levels of hunger and 670 million people do not have access to sufficient food.

Emerging technologies such as Artificial Intelligence, IoT, and sensors, when combined with VC investment, capacity building, and partnerships, offer hope in the fight against world hunger and the global food crisis by helping improve yield and build resilience against climate change

World Hunger Map

VC Funding Down but Bright Spots Remain

The food tech industry had a turbulent year in 2022. The impact of consumer price inflation, the Russia-Ukraine conflict, and supply chain bottlenecks reverberated into the private markets. Accordingly, VC funding in food tech slumped 56% year-on-year, dropping to $20.2 billion across 1,578 deals, per Pitchbook. But despite an overall decline, some segments of food tech such as AgTech, AI in food tech, and upcycled foods remained bright spots for the sector, and are likely to play a crucial role in achieving food security.

Critical Intersection of Food and Technology Investment

Despite being the largest and one of the oldest industries on earth, the food industry has seen minimal digital penetration. Venture capital funding has a key role to play in revolutionizing the food industry by catalyzing the development and implementation of innovative solutions to some of the most pressing industry challenges. Cutting-edge technologies like artificial intelligence, advanced analytics, and interconnected sensors possess immense potential to protect crops, bolster yields, enhance water efficiency, and establish a more sustainable and resilient system for crop cultivation.

The creaking global food system has become a fertile ground for tech innovation in the sector, which is imperative for food sustainability and reversing the vulnerabilities faced by the global food system. The food tech sector is still very much in its nascent stage, with ample opportunity for the growth and development of innovative food products. Not only is tech innovation central to sustainably feeding the 7 billion and counting global population, it is important for decreasing waste and minimizing the environmental impacts of a growing human population.

A Compelling Opportunity

Today’s food crisis paints a compelling picture for investors to speed up their investments in solutions aimed at enhancing the global food system. Climate change, the Russia-Ukraine conflict, supply chain bottlenecks, soaring prices, and the pandemic have led to a greater risk of a food crisis. Due to the heightened focus on mitigating supply chain risks in the food industry, there has been a pronounced drive toward optimizing and advancing local food production.

As a result, VC investors have taken notice of the promising potential offered by innovative vertical farming and indoor farming startups that employ cutting-edge agricultural methodologies and technology-driven solutions. New York-based indoor farming start-up Gotham Greens, which raised $310 million in Series E funding in September 2022, is a key player in the fast-growing microgreen market that is expected to reach $2.2 billion by 2028, growing at a CAGR of 11.1% from 2021 to 2028, per Allied Analytics. San Francisco-based Plenty is also using IoT technology, robotics, and data science to achieve enhanced efficiency and reduce wastage, while simultaneously generating economies of scale. By incorporating these cutting-edge technologies into its operations, the company is well-positioned to stay ahead of the competition and reap significant benefits in terms of increased productivity and profitability.

Similarly, generative AI in food tech is emerging as a strong theme. Generative AI can be used for new recipe development, flavor profiling, analyzing food trends, and optimizing menu offerings accordingly. Lunchbox, a restaurant tech startup, recently introduced a free food photo generator powered by AI technology developed by OpenAI. Additionally, SWIPEBY, another food tech start-up, has developed a similar text-to-photo tool utilizing technology from OpenAI and Stability AI. Food tech start-ups are also using traditional AI to add value to the food ecosystem. San Francisco-based Brightseed, which raised a $68 million Temasek-led Series B round in May, uses AI to track the interaction of plant-based bioactives with human biological systems and discover health benefits. Upcycled food is an emerging theme in food tech that offers significant opportunities for innovation, sustainability, and economic benefits. Canada’s Outcast Foods is at the forefront of this trend with its technology and strong partner network.

A Growing Ecosystem

The food industry contributed nearly $1.3 trillion to the US GDP in 2021. The same year, food spending by US consumers, businesses, and government entities reached $2.12 trillion, per data from the US Department of Agriculture, highlighting a massive potential addressable market. With consumer demands and focus changing constantly, the demand for innovative food tech solutions is expected to increase in the coming years.

With consumers increasingly willing to pay a premium for food tech innovations that can meet their ever-increasing needs for convenience, taste, health, and low environmental impact, the food tech ecosystem has experienced significant growth in recent years, with the combined enterprise value now estimated at $1.3 trillion, up 18% since the end of 2021.

Furthermore, the need for food innovation driven by sustainability concerns is only going to become more critical in the world’s fight against climate change. Foodtech companies that can position themselves as leaders in this push for sustainability will undoubtedly attract attention and investment.

Looking ahead, the food industry’s strong focus on boosting efficiency and productivity while minimizing waste is poised to revolutionize the agricultural sector and offer significant investment opportunities.**

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-The MVR Team