Generative AI businesses are receiving forty percent of all venture capital funding going towards cloud enterprises, according to venture capitalists Accela.
TakeAway Points:
- According to research from VC firm Accel, venture financing for cloud businesses in the U.S., Europe, and Israel is expected to increase for the first time in three years this year, rising 27% year over year.
- According to Accel, 40% of the $79.2 billion that cloud companies raised was invested in generative AI startups.
- In an interview this week, Accel partner Philippe Botteri stated that “AI is sucking the air out of the room” when it comes to cloud computing.
AI startups gets 40% cloud investment
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.
Cloud growth and AI
Much of the growth of funding in the cloud is being driven by excitement around AI.
“AI is sucking the air out of the room” when it comes to clouds, Philippe Botteri, partner at Accel, said in an interview this week. “This is both visible on the public market 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.
Top six generative AI companies
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.