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Doubts circulate about how long the AI startup fanfare will last

The trend: AI is still buzzing, but doubts are circulating about the sector’s startups’ longevity.

  • Index Ventures partner Mark Goldberg said ChatGPT’s viral debut led some investors to overestimate consumer interest, per The Wall Street Journal
  • OpenAI’s ChatGPT traffic dropped 9.7% from May to June and another 12% from June to July, according to Similarweb data, sending bankruptcy rumors swirling. 
  • ChatGPT wasn’t alone. Similarweb data also showed Midjourney’s monthly visits declined for three consecutive months ending in July, while Synthesia saw declining user growth for six straight months, per The Journal.
  • Despite raising $125 million last fall, Jasper laid off staff after a four-consecutive-month user drop that ended in July. 

AI frenzy still going strong: Nvidia is serving as a kind of bellwether for AI demand. Its blockbuster Q2 earnings report indicates that the AI sector’s pulse is still strong.

  • Although overall US VC funding dropped by nearly 50% in Q2, investment in generative AI startups increased 65% to $3.3 billion, according to PitchBook, per The Journal. 
  • OpenAI rival AI21 Labs just grabbed $155 million in Series C funding, sending its valuation soaring well into unicorn territory. 
  • Despite the perceived financial woes, OpenAI is on track to gain $1 billion in revenuesover the next year, or around $80 million a month, per The Information.
  • Synthesia CEO Victor Riparbelli said the company just completed its best sales month ever, per Wall Street Journal reporting. 

Similarweb data isn’t supplying a complete picture of these startups’ financial performance. 

  • Revenues from APIs are likely a significant factor. 
  • Users might be willing to continue paying monthly AI tool subscription fees even if their number of site visits waxes and wanes.

AI will stick, some startups won’t: The AI sector has unique challenges that will continue making it difficult for some startups to gain traction.

  • Getting a foothold requires access to high-powered chips, which are in short supply.
  • Steep development costs paired with uncertain consumer interest for a given product mean shaky business models.
  • Even if some startups mint a compelling AI product or service, deep-pocketed Big Tech companies like Google and Microsoft could replicate it.
  • The most successful startups will be ones that can effectively attract robust investor attention while also leveraging their scrappy, streamlined structures to make technical breakthroughs on the AI front that translate into competitive products that are hard for Big Tech to match