The Rise of Generative AI – Tech Scaleup Silicon Valley 2023 Report


2023 has been a year of transition for the venture capital (VC) and innovation economy. 
After two years of record-breaking investment, the VC market has cooled in recent months due to a number of factors, including rising interest rates, inflation, and the ongoing war in Ukraine.
Despite the slowdown, there are still many reasons to be optimistic about the VC and innovation economy. The world continues to face a number of complex challenges, and innovation is essential to solving them. VCs are still investing heavily in startups that are developing new technologies to address these challenges.
Here is a brief overview of how 2023 has been so far for the VC and innovation economy:

Venture capital investment has slowed.

VC investment in the US fell by 34% in Q2 2023 compared to the same period last year. 
This is the biggest quarterly decline in VC investment since 2016.

Later-stage deals have been hit the hardest.

The decline in VC investment has been most pronounced in later-stage deals. This is because investors are becoming more cautious about investing in companies that are not yet profitable.

Valuations are coming down.

The slowdown in VC investment has also led to a decline in valuations for startups. This is good news for investors, but it can be challenging for startups that are raising money in the current environment.

IPOs have dried up.

The IPO market has also dried up in recent months. This is making it more difficult for startups to exit and return capital to their investors.

Despite the slowdown, there are still many bright spots in the VC and innovation economy. 
For example, investment in early-stage startups remains strong. 
This suggests that VCs are still bullish on the long-term prospects for innovation.

We are also experiencing a rise of deeptech. Deeptech startups are developing new technologies that are based on cutting-edge scientific discoveries. These startups are attracting significant investment from VCs, as they have the potential to revolutionize entire industries. 
Within deeptech, AI startups are front and center. Silicon Valley and San Francisco are (as usual) leading the pack on the innovation movement, with 2,101 AI scaleups that raised $143.7B in total.
Therefore, it does not come as a surprise that Open AI’s president Sam Altman has called San Francisco “the best place to start an AI company”. A new zone designated “Cerebral Valley” or “HAIyes Valley” (with hacker houses operated out of historic Victorians near Alamo Square) is attracting AI startups from across the country, and expanding AI companies are growing their office footprint in the City.

Investments into AI companies have sped up over the past decade. 
More than $300 billion in venture funding was invested in over 16,000 companies in the sector between January 2013 and Q3 2023, according to Crunchbase data. 
As of Q3 2023, an estimated 1 in 4 venture dollars in the U.S. this year has gone to a startup that incorporates artificial intelligence in its business, Crunchbase data shows. 
”The productivity gains generative AI will enable could be profound,” said Gené Teare, Senior Data Editor at Crunchbase News. “Sectors that stand to benefit include health care, product and engineering, cybersecurity, robotics, marketing, design and law and research, among others.”

As Liz Lindqwister wrote in The San Francisco Standard: “The rise of these hacker homes feels, 
in many ways, like a return to tech’s Wild West era, when scrappy startups sought to change the world from the garage of a Palo Alto home—or in this case, an Alamo Square Victorian.

Only time will tell whether this new Wild West will yield a new gold rush.”