AI deals hit by funding winter but VCs eye fresh opportunities

SOUTH-EAST Asian venture capital firms (VCs) are on the hunt for opportunities to invest in artificial intelligence (AI) startups, with the breakthrough of ChatGPT stirring fresh excitement. This comes after funding into the sector took a hit last year from tough market conditions.

VCs invested US$12.3 billion into AI in Asia-Pacific last year, down 46.5 per cent from 2021, according to analytics company GlobalData. The deal count meanwhile fell 5.3 per cent to 1,087.

Investor sentiment took a hit globally across the board, with volatile market conditions, and the AI sector was no exception, said Aurojyoti Bose, lead analyst at GlobalData.

That said, AI is still a strong theme that regional VCs are looking at. This is especially with the industry’s breakthrough late last year in generative AI tools, such as OpenAI’s ChatGPT, that can create new content in text, images or other formats.

“The field of generative AI is poised for significant growth and development in the coming decade, much like the Internet in the late nineties,” said Vinnie Lauria, founding partner at Golden Gate Ventures. “While big tech companies will undoubtedly dominate the landscape, there will still be opportunities for startups to carve out their niche, particularly in South-east Asia.”

Lauria sees potential in business-to-business (B2B) AI applications. He reckons that South-east Asia has the right ingredients to nurture more AI startups, with product development and business expertise in Singapore, and a talented pool of engineers in Vietnam.

Golden Gate has over US$10 million in exposure to AI. Portfolio companies include San Francisco-based Obviously.ai, which allows non-technical business analysts to run predictive models; Japan-based Cinnamon.ai, whose AI reader extracts data from unstructured documents; and Traverse, a Singapore-based startup that taps AI to automate feasibility assessments for infrastructure projects.

US-based Lightspeed Venture Partners, which has an office in Singapore, is similarly bullish on AI opportunities. It is looking into use cases embedded in specific enterprise workflows, such as marketing and sales, legal functions and code generation.

“Another exciting theme for us is the potential for AI-based assistants to change human-computer interaction and unlock significant value,” said Lightspeed partner Dev Khare.

On the generative AI front, Lightspeed joined OpenAI competitor Stability AI’s US$101 million fundraiser last year, and prior to that, invested in India-based text-to-video company Rephrase.ai.

Khare sees “ample opportunities” for new AI companies to emerge – less so on the platform layer, which is already dominated by big tech, but more on the application front. For instance, Lightspeed in February invested in Tome, a US startup that taps generative AI to create presentation decks from simple prompts.

Generative AI could also boost non-AI startups in the region. Peng T Ong, co-founder and managing partner of Monk’s Hill Ventures, highlights that generative AI could be tapped by logistics companies to improve communications with customers on parcel tracking, or by financial planning apps to provide AI relationship managers.

Finian Tan, chairman and founder of Vickers Venture Partners, similarly sees South-east Asian startups in the fintech, e-commerce and logistics sectors tapping generative AI to enhance customer experience and optimise operations.

Vickers is unlikely to fund “single-function, application-layer” AI startups due to the market risks, but is optimistic about companies enabling the mainstream adoption of AI.

“By tracking the needs of application developers and the new developments in foundation models, startups – including those in South-east Asia – have a good chance to capture significant value in the enablement of AI applications,” said Tan.

With the excitement around AI, some startup founders such as Dorothea Koh, chief executive officer of healthtech AI startup Bot MD, see a lot more inbound queries from VCs. Many ask her how Bot MD’s AI clinical assistant technology is different from ChatGPT, which allows her to explain the underlying technology and medical use cases.

“ChatGPT has really helped; the buzz around ChatGPT has really made people a lot more aware of what AI bots can do,” said Koh, who added that many investors are also interested in medical AI because of the defensive nature of the healthcare sector.

Valuation bump

With all the buzz around AI, deals have seen a “significant bump in valuation, with a lot of money chasing this space globally”, said Lauria.

Lightspeed’s Khare also sees increased competition for deals, especially in the US where VCs have been flooding generative AI players with dollars. Several new unicorns have emerged in recent months, such as Stability AI and AI content creation startup Jasper.

He noted that while this trend has yet to materialise in this region, “this may change as more founders build in this area, and investors become exposed to high-quality teams”.

Likewise, Vickers’ Tan noted: “The broader AI sector has yet to see a commensurate lift, but we believe that as it becomes clearer to both industry and investors where the real opportunities in AI lie, valuations in those areas will follow suit.”

That said, investors are also still figuring out the risks associated with AI. One discussion is whether the technology “helps to perpetuate inherent biases or give a false veneer of objectivity”, said Lauria.

The outlook for AI deals in 2023 is also hazy, given that new macro challenges continue to surface, the latest being the collapse of Silicon Valley Bank.

Despite the challenges, Tam Hock Chuan, managing director of Vertex Growth, still sees an upward trend. “ChatGPT has stirred up a lot of interest and I’m sure (out of) the new startups, there’ll be disproportionately more AI and GPT-related AI startups coming into the market. As a result, there may be more funding, just purely because of the increasing supply (of startups),” he said.