Perplexity and Writer, among others, lead new wave of investment as base model developers see valuations return to rationality

The Artificial Intelligence (AI) sector continues to attract global investors in 2024. Despite the market's caution about the general economic outlook, the investment boom in the AI sector remains strong. In January 2024, global venture capital funds invested $5.7 billion in AI-related companies, or 22% of total VC investments, indicating that the AI industry's ability to attract money remains strong. However, the valuation structure of AI startups is changing, and the valuation multiples of AI startups focusing on specific application areas are increasing rather than decreasing, which has become the new focus of investors.

Base model valuations return to rationality

OpenAI and Anthropic The underlying models developed by companies such as AI, with their strong technical capabilities, have led the way in the AI wave, and their valuations have risen. As the market matures and investors begin to assess the value of the underlying models more rationally, their valuation multiples have declined compared to the same period last year.

AI Application Layer Shows Explosive Power

Unlike basic model developers, startups that have landed AI technology in real-world application scenarios, such as Perplexity, an AI search engine, and Writer, an AI copywriting tool, are showing strong growth momentum, with their valuation multiples bucking the trend.

Jai Das, President of Sapphire Ventures, said, "AI app companies are experiencing unprecedented high growth, which is why investors are willing to commit at high valuations." He emphasized that companies continue to increase their spending on AI, primarily focusing on the potential of AI software to boost employee productivity and reduce operational costs. AI application developers are able to generate revenue faster and show profitability prospects than the billions of dollars invested in basic model development, which also makes investors willing to give higher valuations.

Perplexity The company's example is illustrative. The company's AI search engine had annualized recurring revenue of more than $80 million in January 2024, up from $50 million in November 2024, a whopping 601TP3 T. Despite this, Perplexity was valued at $8.5 billion at the time of its November 2024 funding round, representing a valuation multiple of 170x. This demonstrates the market's extreme optimism for the future of AI applications.

Industry-Applied AI Startups in Favor

AI startups that focus on industry-specific applications are more likely to be favored by investors and enjoy higher valuation multiples. For example, Abridge, a healthcare-focused company whose AI technology transcribes and analyzes conversations between doctors and patients to find critical medical information that can dramatically improve healthcare efficiency, closed a $250 million round of financing in the fall of 2024 at a valuation of $2.5 billion, a valuation multiple of 50x. Investors are optimistic that such companies will be able to build a stronger competitive advantage by training models on industry-specific specialized data.

Capital Market Expectations for AI

Looking ahead to 2024, the AI investment market is expected to be even more robust, with NatLawReview.com predicting significant growth in the IPO market for AI companies in 2024, driven by strong industry growth and market conditions, and Dentons pointing out that companies will be more active in strengthening their AI capabilities through mergers and acquisitions (M&A) to stay competitive in the fast-moving technology race. to stay competitive in the fast-moving technology race. This means that AI investments will gradually enter the harvest period, with early stage investors expected to realize a return on their investment through IPOs or M&A.

Valuation bubble risk remains

While the outlook for the AI industry is bright, some experts are concerned about high valuations, with J.P. Morgan Asset Management cautioning investors to carefully evaluate the future potential of AI companies and weigh that against the expected returns reflected in current share prices. Finro Financial Consulting also noted that as the market matures, investors should focus more on the fundamentals of AI companies rather than just chasing high-growth themes.

Overall, the development of AI industry has entered a new stage, and investors have become more rational in valuing AI startups. Compared with the "technology-only" theory in the early days, the market now emphasizes the practical application value and profitability of AI technology, and in 2024, AI application startups are expected to become a new force leading the growth of the market.