Several AI startups building applications based on large language models (LLM) are rapidly growing their sales and initiating a new race to commercialize cutting-edge technologies. Their rapid growth has attracted the attention of investors willing to invest hundreds of millions of dollars in developing consumer AI products.
Investors are betting on companies like Cursor, Perplexity, Synthesia, and ElevenLabs. These startups are building applications based on powerful generative AI (GenAI) models provided by OpenAI, Google, and Anthropic. They are helping to drive broader adoption of rapidly evolving technologies in both consumer and enterprise environments.
According to analytics platform Dealroom.co, the volume of funding for AI startups in 2024 will amount to $8.2 billion, up 110% from 2023. The investment frenzy reflects the high interest in AI tool developers, who could raise hundreds of millions of dollars amid skyrocketing demand.
Leading Players and Surging Valuations
AI search engine startup Perplexity raised $500 million in December in its fourth funding round of the year, tripling its valuation to $9 billion. The company is currently in talks for another round at a significantly higher valuation, according to sources. Meanwhile, legal AI startup Harvey raised $300 million in February.
Startups building apps for software developers have also seen increased investor interest. Companies like Reflection AI, Poolside, Magic, and Codeium have raised hundreds of millions of dollars in 2024 to develop technologies aimed at improving programmer productivity. In January, Anysphere, the developer of the Cursor automation tool, raised $105 million at a $2.5 billion valuation. Sources say investors are now interested in the company at a valuation of $10 billion or more. The three-year-old startup has already achieved annual recurring revenue of $200 million.
AI startups have also benefited from increased competition in the LLM market, which has led to lower costs for processing requests and generating AI responses. This has allowed them to use the LLM infrastructure without having to build their own expensive AI models, speeding up time to market.
Uncertain Sustainability and Investor Caution
Bret Taylor, chairman of OpenAI and co-founder of Sierra, noted that the company has changed its AI models at least five to six times in a short period due to the rapid pace of change in the industry. Sierra, a startup developing AI-powered customer support agents, was founded in February 2024 and reached a $4.5 billion valuation in October. According to Taylor, using a two-year-old AI model today is like driving a car from the 1950s, as the technology is quickly becoming obsolete.
According to an analysis of payments data from fintech company Stripe, the largest AI companies are reaching millions of dollars in sales within their first year of operation. This is happening much faster than in other tech sectors, demonstrating the ability of applied AI to quickly form sustainable business models.
However, it is still difficult to assess how robust the customer base of AI startups is and how sustainable their current revenues will be. Amid the general interest in AI, early adopters are coming quickly, which can distort growth figures and does not guarantee long-term subscriptions. Some investors are avoiding the race for the most popular apps, fearing that even the best of them are simply service “wrappers” on existing AI models.
There is also a risk that such startups will be displaced if a larger company with a substantial user base replicates their functionality, notes NIXSolutions. Hannah Seal, a partner at venture capital firm Index Ventures, which has invested in legal AI assistant Wordsmith, notes that many of these AI startups have not yet gone through a full annual subscription renewal cycle. Therefore, the level of customer churn remains unknown and could significantly impact future growth. We’ll keep you updated as this market continues to evolve.