Is Artificial Intelligence the new Gold Rush?
The California Gold Rush started on January 24, 1848, when James W. Marshall found gold from Sutter’s Mill in Coloma, California. The news spread and around 300,000 people came to California from around the world in search of gold and new wealth boosting the American economy. (1) More than 150 years later, the same phenomenon is repeating with the emergence of artificial intelligence as the most lucrative investment opportunity in 2017.
In 1965 the average tenure of companies on the S&P 500 was 33-year which is forecasted to shrink to 14 years by 2026. (2) The development of artificial intelligence technology has reached a certain maturity point where a rapidly growing number of companies have started to apply the technology as a core part of their business. The graph below depicts well how investment capital has increased to artificial intelligence startups in the past 5 years growing total funding by 8.5X. (3)
Global spending on AI by technology giants is estimated to be up to $30 billion in 2016 from which 90 percent went into R&D and deployment and 10 percent into acquisitions. In 2016, venture capitalists invested $5 billion, private equity firms invested $3 billion and grants and seed funding represented a total of $1 billion of investments in AI. Most of the investment news are coming from the suppliers of AI technologies and many use cases are still in their experimental phases. The markets currently have a relatively small number of AI products and the introduction of new market-ready AI products and services is sluggish. That’s why, widespread adoption will take some time and analysts remain divided in their estimations of AI’s true economic impact and benefit. Current AI market forecasts vary from $644 million up to $126 billion by 2025. Considering the amount of investment capital flowing into AI currently, the more conservative estimations would indicate that we are going through another boom-and-bust cycle. (4)
The increasing competitive pressure caused by disruptive startups have made technology giants and established corporations active acquires of AI talent and technology with over 200 acquisitions made in the last 5 years. Machine learning applications have especially gathered interest due to their potential in automating organisational processes enabling major cost-savings and business transformation possibilities. Machine learning is an enabling technology for company’s digital transformation journeys and it received the biggest share of external and internal investment which was up to $7 billion as shown in the graph below. (4)
Industries that have a history of adopting digital technologies in the past are more likely to adopt AI as the next wave of digitisation. Digitally mature industries with a variety of digital assets, robust infrastructure, talent and capabilities are early adopters of AI. They have already made significant investments into digital technologies such as big data and cloud computing and have a high potential of gaining benefits and finding use cases that bring return on investment. Industries with high investment interest and potentially major yields from AI include high technology, telecommunication, commerce, manufacturing and marketing. (4) Across different verticals healthcare and wellness has been the hottest investment category with 270 deals in the area since 2012. Fintech and insurtech gathered significant VC interest in the Q1 of 2017 with over 30 deals in the category. Below is heatmap of deals distribution of AI startups that showcases what is the level of deal saturation and how different categories have attracted investments. (3)
Investments into AI are increasing across the board as leading venture capital firms alongside corporations race to invest into the most promising next generation AI startups. Technology giants including Alphabet, Microsoft, Apple, Salesforce.com, Amazon, and IBM are some of the most active acquirers which all compete in creating their own intelligent ecosystem based on AI. Alphabet has been the most proactive buyer having acquired 20 AI startups including DeepMind which develops cutting edge deep learning technology as well as Kaggle that has developed a data science community of over 500,000 data scientists. Intel has been the most active corporate investor with 81 total investments into AI companies among with other investors including Telefónica, Qualcomm and SoftBank. In the venture capital space, Y Combinator has invested the most with a total of 75 investments followed by companies including 500 startups, Techstars, Sequoia Capital and Andreessen Horowitz depicted in the graph below. (5)
The economic interest towards AI has been so strong that Y Combinator has decided to offer a special vertical track that is exclusive for AI startups. Y Combinator argues that we might be going through the biggest leap in technology since the introduction of the Internet and thus they are giving AI special attention and focus. The company offers AI entrepreneurs access to machine learning engineering talent, extra cloud computing space for GPU instances and connects them with industry though leaders via speaker sessions. Y Combinator is looking for a wide spectrum of AI startups ranging from legal tech, healthtech to agriculture and have specified only one specific solution which is robot factories with intelligent robot arms. The company’s vision is to level the playing field for entrepreneurs and they’ve set up a long-term goal of democratising AI. This idea has been shared by many AI thought leaders before and providing equal opportunity for innovators from different backgrounds will be a crucial factor for creating diverse forms of artificial intelligence in the future. (6)
(1) Wikipedia (July 2017). California Gold Rush. Retrieved at: https://en.wikipedia.org/wiki/California_Gold_Rush
(2) Innosight (March 2016). Corporate Longevity: Turbulence Ahead for Large Organisations. Retrieved at: https://www.innosight.com/insight/corporate-longevity-turbulence-ahead-for-large-organizations/
(3) CB Insights (April 2017). The State of Artificial Intelligence. Retrieved at: https://www.cbinsights.com/research-artificial-intelligence-trends-report
(4) McKinsey Global Institute (June 2017). Artificial intelligence — the next digital frontier? Retrieved at: http://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/how-artificial-intelligence-can-deliver-real-value-to-companies
(5) Recode (May 2017). Google parent company Alphabet has made the most AI acquisitions. Retrieved at: https://www.recode.net/2017/5/19/15657758/google-artificial-intelligence-ai-investments
(6) Y Combinator (March 2017). YC AI. Retrieved at: https://blog.ycombinator.com/yc-ai/