For many companies, 2023 was a year of discovery for generative AI – after the breakout success of ChatGPT and GPT-4, the power of the technology was suddenly apparent to a much larger audience. However, 2024 may be an even more pivotal year, as it will demonstrate the value of many real-world AI applications. Generative AI will lead to huge productivity gains, enable employees to do more creative and engaging work, and have a catalytic effect on many areas – from content creation to customer service to business processes.
Although AI will continue to be the largest sector of VC investment in the United States in 2024, it will also go through a hype cycle that could take two years or more. This period will be crucial for determining which companies are capable of integrating AI profitably and which applications add the most value. As SaaS vendors aggressively integrate generative AI into their product portfolios, a core priority will be adapting or eliminating legacy systems to efficiently handle this shift. The startups capable of innovating on existing business models or offering unique datasets have the potential to become generational companies.
While 2023 was the year generative AI surged into the mainstream like never before, 2024 will be more results-oriented. It’s time for companies to demonstrate tangible value with their generative AI applications – those that do will set themselves up for dramatic long-term growth.
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The AI revolution continues
Before we can take a hard look at the concrete value propositions of generative AI applications in 2024, it’s necessary to reflect on the extent of the AI-powered transformation many companies will experience in the coming years. For example, there will be fundamental changes to the ways employees work. According to IBM, executives expect that 40 percent of workforces will need to “reskill as a result of implementing AI and automation over the next three years,” while the World Economic Forum projects that 44 percent of employees’ skills will be disrupted.
While almost half of employees are worried that AI threatens their jobs, 70 percent say they would “delegate as much work as possible to AI to lessen their workloads.” This is a reminder that AI will free employees up to do more innovative work while drastically increasing the performance of key processes. A recent Accenture study found that 98 percent of executives think AI foundation models will play an important role in their strategies over the next three to five years, while 97 percent expect AI to enable connections across data types.
In 2024, there will be a focus on AI-native applications capable of solving complex use cases while enhancing efficiency and collaboration. Large traditional enterprises will embrace generative AI for productivity gains, which will be a multi-billion-dollar opportunity for companies serving the real economy. This trend is already prevalent in sectors like restaurants, logistics, food delivery, construction tech, and finance, and it will continue to expand.
It’s clear that 2023 was a hinge year for generative AI – 79 percent of organizations told McKinsey that they’ve had some exposure to the technology, and three-quarters say it will cause “significant or disruptive change in the nature of their industry’s competition in the next three years.” This is why investments in generative AI will continue to rise.
Assessing the value of AI integrations
At a time when there’s so much enthusiasm for a new technology, it’s important for investors to recognize that many applications are bound to fail while others will rapidly evolve. Generative AI is an extremely dynamic technology, and it will be tested and implemented in innumerable ways – even over the short term. Investors should beware of companies that won’t outlive the hype cycle we’re witnessing and instead focus on innovative applications that meet critical market needs and are capable of iterating effectively.
For example, AI-native SaaS applications will disrupt and streamline the workflows generated by Anthropic’s Claude and OpenAI’s ChatGPT. There will also be a resurgence of mobile-first productivity, where having access to information is no longer enough – users will want to make decisions and take action on the go. The mobile experience for productivity apps will improve as smaller AI models enable iOS and Android devices to become true control centers.
As companies look to consolidate their vendors, SaaS providers have made AI integration a top strategic priority. Over two-thirds of SaaS companies have AI capabilities, and 56 percent report that they’re planning to “advance new AI initiatives within the next six months.” This means startups that want to offer generative AI solutions for specific product categories will struggle to compete with larger companies that can simply add these solutions to their existing products. The startups that are capable of leveraging AI to innovate on business models or generating valuable differentiated datasets will have a shot at securing market share and exiting, but these are difficult tasks as companies pour resources into AI.
However, given the sheer range of use cases for AI, many startups will be able to find a niche – especially if they use existing datasets intelligently and creatively. AI enables companies to radically improve operational efficiency, which allows them to do more with less – a fact that isn’t lost on startups.
The future of AI investing
After 2021, VC deals and investments declined rapidly, and they have remained depressed for most of 2023 (despite an uptick at the beginning of the year). Q3 2023 saw the lowest level of fund creation since Q3 2017. With GDP growth expected to fall to 1.5 percent in 2024 and interest rates still at their highest level in decades (despite the Fed’s plan to lower rates next year) investors are wary.
But AI remains a major area of investment. In summer 2023, Crunchbase reported that nearly one-fifth of global VC funding came from the AI sector alone. VCs recognize that AI represents an unprecedented opportunity, but the vast proliferation of AI startups and new applications is all the more reason they’re being cautious about which companies they support. VCs have to identify the areas where AI has the most potential to add substantial value.
McKinsey reports that roughly 75 percent of annual value from generative Artificial Intelligence is delivered by software engineering, marketing and sales, product and service development, and service operations. AI will also play a central role in the acceleration of vertical SaaS, as unique solutions and datasets are increasingly important for competitive differentiation. This development is likely to work against startups, as more established companies have access to networks and data that early stage companies lack. Considerations like these will help investors avoid the hype and unearth real-world value.
While there are plenty of risks for VCs in AI right now, they’re overwhelmingly outweighed by the potential benefits. As AI adoption continues to gain momentum, the task in 2024 will be making strategic investments in companies and applications capable of maximizing the value of the most revolutionary technology in the world.
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