Welcome to the era of artificial intelligence "mega-rounds," where investors write checks to AI startups bigger than your average lottery jackpot.
So far this year, venture capital firms have invested in artificial intelligence startups with 56 rounds of $100 million or more, according to investor database PitchBook. That's more mega-rounds than there were by this time in the previous five years, combined.
In those mega-rounds alone – just the tip of the iceberg of AI investing so far this year – investors gave startups a staggering $13.8 billion. It's a huge milestone for a sector once seen as cool and interesting, but not mature enough for big-time investment. An economy struggling to get up to speed after COVID-19 is embracing AI as never before, leaders of the sector say. And investors don't want to miss out.
CEOs, investors and analysts say the big rounds are proof that AI's time has come – not in theory, or as the next shiny object to dazzle the imagination – but as a reality for companies big and small. AI is where search engines were in 2005, where social media was in 2010, and where customer relationship management was in 2015, these insiders say. It is simply changing everything.
Insiders expect a few companies will rise to be the next batch of trillion-dollar companies, following in the footsteps of Apple, Microsoft, or Amazon before them. But there will be more big companies in AI creating a new world, and the investors believe that writing sizable checks now will create more and bigger payoffs.
"From the investor's point of view, big bets are coming for the companies that are rising to seize opportunities," investor Lip-Bu Tan of SoftBank told Insider.
Ali Ghodsi, the CEO of Databricks, raised the biggest AI round of all so far in 2021, announcing a $1 billion in February. And his firm did it without even showing investors a slide deck of what it plans to do with the money.
"In January we said, 'Let's go fund-raise. My CFO said, 'They're pinging me already. I don't think we'll need a pitch deck.' I thought he was crazy," Ghodsi told Insider. "We argued about it. It took us rounds A, B, C, D, E, and F to raise our first billion. In one week he got another billion, just like that. It was insane."
The $1 billion Series G round led by Franklin Templeton Investments put the company's pre-money valuation at $27 billion. You would need some kind of AI algorithm to keep track of all the investors, which include Microsoft, Amazon Web Services, Salesforce Ventures, Dragoneer Investment and 17 others.
Ghodsi said Databricks, a San Francisco startup of 1,700 that helps companies process data with AI tools, passed on an investor who wanted to put $750 million into the round, because others had already committed and the round was getting too large. "They don't want to miss out. I'm not even sure they have time to do due diligence."
With all that cash in a few pockets and a crowded field of startups, acquisitions are inevitable, Ghodsi believes – and Databricks plans to pursue some. "Consolidation will happen. With this much capital, it's bound to happen."
The COVID-19 pandemic has contributed to a sudden burst of innovation as companies emerge from quarantine, Ghodsi believes. "People's mindsets have changed. For a year we woke up every day and did the same thing. Now vaccines have been created, with the help of AI. So maybe it's possible to do many things that have held society back."
'From the investor's point of view, big bets are coming'
SoftBank's Tan agrees that COVID-19 research has supercharged what was already a powerhouse AI sector. "AI has become the great enabler of innovation," he told Insider. "There has been a data explosion, but then the question arose of how companies were going to use it. You saw how with healthcare, new drug discovery, and COVID-19."
Tan took part in SamaNova's $650 million round earlier this month in his role as external board director of SoftBank, and has been chairman of the board of the startup since 2018 when Walden International and GV led the company's Series A. SoftBank has invested in AI behemoths Nvidia, TikTik-owner Bytedance and the automated car company Cruise.
Rodrigo Liang, CEO of SambaNova, a chipmaker specializing in AI hardware that has seen its valuation skyrocket to $5.1 billion, told Insider that amid COVID-19, research companies like his "became a showcase of what technology can do in the face of some really hard problems." Now, he believes companies coming out of the pandemic are "looking aggressively to catch up" and automation based on AI will play a key role.
"AI could be as big of an innovation as the internet was," Liang said. "It's going to be a force everyone has to materialize for their companies to be competitive."
SambaNova will also look to make acquisitions with its windfall of cash, which brings its total venture capital raised to $1.1 billion. The series D round also included new investors Temasek and GIC, plus existing backers including funds and accounts managed by BlackRock, Intel Capital, GV (formerly Google Ventures), Walden International and WRVI.
Alex Ferrara, a partner at Bessemer Venture Partners, is an investor in BigID, which uses AI and machine learning to help companies track and use their data, and KHealth, which helps patients get medical information and healthcare. Companies need help wrangling data, he told Insider, providing a massive opportunity for AI as COVID-19 gradually releases its grip on the American economy.
"Big banks are reading headcount and seeing they have to do more with less. That means automation." That automation will include tackling the huge data sets companies have collected over the past several years. "Some don't even know where their data is stored" in cloud servers, he said. "They need a tool" such as those BigID provides, he said.
Alex Wang, the CEO of Scale AI, which prepares raw data for processing at scale, just reeled in a $325 million Series E round from lead investors led by Dragoneer Investment Group, Greenoaks Capital Partners, and Tiger Global Management to take his company's valuation "north of a billion dollars." His San Francisco startup has hired 100 people he's never met in person during the COVID-19 remote-work era as it works with big customers including PayPal, Toyota, and Etsy.
Wang told Insider that AI has gotten real for many in just the past few months. "What used to seem like a leap of faith has become critical for companies."
For that reason, he said, "investors are going all-in."