(Report) AI Startups Fall by 69%, but 750,000 People Look to Bootstrap Own AI Product

In this Marketing Report:

• Rise of basement companies: Three-quarters of a million people are looking to bootstrap an AI product in 2023
• DIY AI: 300% more small AI products vs. -69% established AI companies
• AI funding takes a nosedive: 49% fewer companies backed by investors in Q1 2023
• Tech giants who integrated AI outperform by 3.5%
• Conclusion

Not so long ago, an AI chatbot or a language model was for an elite few who had access to these kinds of technologies.  Microsoft casually investing $10 billion dollars in OpenAI or Elon Musk purchasing tens of millions of dollars worth of GPUs for Twitter…This is not something an average business or developer could afford.

But now, we have entered an era of AI democratization where anyone has access to these kinds of technologies and can use it for personal or professional use.  

We have observed a dip in the funding of AI companies, and seen that multibillion-dollar giants of tech have spent billions in AI investments only to see their value stagnate.

Google or Microsoft implementing AI is no longer unique. Instead, businesses are trying to do it themselves. ChatGPT APIs for example are readily available to all and people are searching for it.

Search terms related to “AI” on Google have gone from 7.9 million in November 2022 to 30.4 in March 2023.

With the democratization of AI, single developers are capitalizing on the recent hype surrounding the technology by shifting the focus of the AI revolution towards smaller entities.  This allows for innovation in the use of AI, which can then be applied to benefit all kinds of businesses.  

Rise of basement companies: Three-quarters of a million people are looking to bootstrap an AI product in 2023

AI systems by the people, for the people

With AI systems being more readily accessible to all, it has given many the possibility to start their own basement companies and bootstrap AI businesses. Just take a look at GitHub’s Star History. 

GitHub is a cloud-based service for developers to manage, store, and alter all of their code and the Star History represents the number of times a repository has been “starred” or “bookmarked” over a period of time.

In recent months, many of the most popular DevTools on GitHub have been created by individuals who previously lacked access to sophisticated AI tools. 

3x more “small” AI products launched in Q1 compared to last Q4

Not only on GitHub can we see developers creating new AI programs and sharing them but also on websites such as Product Hunt. Once the dev part is done, and it’s time to launch, Product Hunt is the place to do so.

So looking at the new products launched on Product Hunt gives us an idea of where pre-seed companies are moving.

DIY AI: 300% more small AI products vs. -69% established AI companies

Although most of us are probably most familiar with a small handful of AI companies, a vast number of startups have emerged in recent years. Nonetheless, the trend of an increasing number of new AI startups has not continued.

Despite the general decrease, certain regions of the world have shown a more pronounced trend. Europe and Asia experienced a larger-than-average decrease, with a decrease of 77% in the number of new AI startups created in 2023.

83% of AI startups in 2023 have fewer than 10 employees

With AI systems being accessible to more than just the elite few now, many have taken on the initiative to start their own, solo or small team businesses that they can easily carry out from their basements or a side job since there are infinite AI programs that can be created.  

AI funding takes a nosedive: 49% fewer companies backed by investors in Q1 2023

But this decrease in the number of funded AI companies is not something new. According to Crunchbase, what was once a steady increase in the number of AI companies receiving funding had already started to decrease in 2022 and is looking to hit numbers by the end of 2023 that we haven’t seen since 2016.  

The economy bites: overall investment drops by 43%, AI by 49% in Q1

This hype around AI has come at an incredibly unfortunate time for itself. 2022 was a year of “geopolitical instability, inflation, rising interest rates, and recessionary fears.” As a result, there is a sense of apprehension among venture capital investors, which has led to a shift in the investment landscape. 

Instead of investors competing to fund startups as they aggressively did in 2021 and 2022, startups are now competing for the limited investment opportunities that are available.

The small difference can be attributed to the Federal Reserve raising interest rates which led to investors seeking immediate cash generation rather than investing in businesses for future returns. Inflation, rising costs for goods and services, and a strengthening US dollar also impacted tech companies, particularly those relying on advertising and multinational business.

Funding for AI companies expected to plummet by 38% by end of 2023

By analyzing the average percentage of Q1 investments over the years, both globally and in the AI sector, from 2015 to now, we can anticipate a similar trend for both types of investments, resulting in a reduction of around 30% and 38%, respectively, by the end of 2023.

Although the total amount of AI companies invested in decreased in Q1 of 2023, funding for the 540 companies surpassed that of last year’s 1051, with a total of $15,376,852,251 being invested by investors – a 10% increase from the previous year’s funding during the same quarter.

OpenAI is driving the hype: It’s worth a third of all of 2022’s AI investments

The larger amounts of total funds come from OpenAI. The giant Microsoft decided to invest $10 billion in the AI system back in January of this year. OpenAI received 641% more funding than the top-funded AI company in 2022, Cruise.   

Acquisitions and mergers in AI sector follow downward trend with 23% decrease in Q1 2023

However, it’s not only investments that have declined; there has also been a noticeable decrease in acquisitions and mergers within the AI sector.

In Q1 of 2022, there were a total of 100 acquisitions and mergers.  Among the most prominent deals, Apple acquired AI Music and Salesforce purchased Troops.

Fast-forward to the same time period in 2023, and we witnessed a 23% decrease, with only 77 acquisitions and mergers having taken place. This decline comes after a previous consistent upward trajectory in the acquisition of AI companies in Q1 over the past eight years. 

However, this downward trend aligns with our predictions of an overall decrease in acquisitions and mergers, which we have already observed in 2022.

However, despite the decline in acquisitions and mergers, the percentage decrease in this area is not as substantial as the decrease in funding for AI startups (49%). With only a predicted 4% decrease by the end of 2023, investors and larger corporations have shown a preference for investing in more established and safer ventures within the AI sector rather than smaller startups, who are expected to see a 38% decrease in funding before the end of the year.

Tech giants who integrated AI outperform by 3.5%

Similarly, when examining companies on the same NASDAQ list that did not announce any new AI integration during that period, we can observe a comparable trend to those that did, with little variation observed within the quarter.

If we take a look at the average increase in stock price in Q1, companies who announced a new AI system experienced an average stock price hike of $11.83, whereas those who did not make any such announcement saw roughly the same increase with $11.46.

Microsoft gains $277 billion off AI, while Google loses $100 billion 

However, it is worth noting Microsoft’s success beyond the month after its announcement. 

After launching various AI systems in partnership with OpenAI, Microsoft’s stock has risen by 16% as of April 24th, 2023, following their announcement of a $10 billion investment in OpenAI in January.   

Google on the other hand failed to live up to the hype of its own conversational AI service, Bard.  Unlike Microsoft, Google opted to develop its own generative AI and language models and offered the service to its clients. 

Although it is unsure how much Google invested in the creation of the AI service, following its announcement, Google’s stocks have only increased by 3% as of April 2023 and even experienced a 17% dip shortly after the announcement.

Microsoft and Google have always been leaders and rivals in the tech development race.   However, with Microsoft’s latest innovation, which combines its search engine Bing with conversational AI to create a new way of browsing the web, could this spell the end of Google’s dominance in the search engine industry?

Conclusion

The democratization of AI has made it more accessible to people and businesses worldwide. We’ve seen a surge of interest reflected in the exponential growth of search volumes for AI-related terms such as AI APIs and ChatGPT, and we are witnessing what the next wave of AI startups will look like from the rise of basement companies.    

Although larger tech companies continue to invest heavily in AI, smaller entities, such as single developers, are capitalizing on the hype surrounding the widely available technology and creating applications and product-market fit. 

Methodology

To develop this report, we used a variety of platforms to gather our data.

• Crunchbase – Number of AI companies and their funding from January 2015 to April 2023
• Google Ads – Keyword volumes between January 2022 and April 2023
• Product Hunt – Number of AI products advertised from January 2022 to April 2023
• GitHub – Number of AI repositories available on the platform between January 2022 and April 2023
• Google Finance – Stock market prices in 2023

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