VCs invested over $75B in AI startups in 2020

Investments in AI are growing at an accelerated pace, according to a new report from the Organization for Economic Cooperation and Development (OECD). The Paris, France-based group found that the U.S. and China lead the growing wave of funding, taking in a combined 81% of the total amount invested in AI startups last year, while the European Union and U.K. boosted their backing but lag substantially behind.

“The venture capitalist (VC) sector tends to forerun general investment trends, indicating the AI industry is maturing. As the AI industry matures, the median amount per investment is growing, there are more very large investments and proportionately fewer investment deals at early stages of financing,” the report reads.

OECD’s study analyzed VC rounds in 8,300 AI companies worldwide, covering transactions between 2012 and 2020 that were documented by capital market analysis firm Preqin. According to the findings, the global annual value of VC investments in AI startups grew from $3 billion in 2012 to nearly $75 billion in 2020. Funding increased 20% last year alone, with startups based in the U.S. and China nabbing over 80% of all investments in 2020. The European Union followed with 4%, trailed by the U.K. and Israel at 3%.

The report also found that growth in AI investment in U.S.-based firms has been steady since 2012, reaching $42 billion in 2020. Chinese companies experienced a spike in 2017 and 2018, followed by a slump in 2019, and represented $17 billion in 2020.

Companies developing driverless vehicles and mobility technologies attracted the most investment of all AI companies, drawing $19 billion in VC money during 2020 and $95 billion from 2012 to 2020. The second-biggest segment was health care, drugs, and biotechnology, which raked in 16% of the 2020 investment total. VC funding rounds in these related industries doubled from $6 billion in 2019 to $12 billion in 2020 — most likely as a result of the pandemic. AI business processes and support service startups ranked third in VC investments in 2020, meanwhile — also likely due to the pandemic, which motivated digital transformations and remote and hybrid work arrangements.

Potential and risks

The outsized investment in autonomous vehicles reflects the belief among investors that AI has the potential to address worker shortfalls in transportation. According to the American Trucking Associations (ATA), the sector was short 60,800 drivers in 2018. If the shortage is left unchecked, ATA expects it to swell to more than 160,000 drivers nationally by 2028. In a worrisome sign, the U.K. was forced to recruit the army to drive fuel trucks to gas stations, owing to a shortage of available drivers.

Momentum in the life sciences field is less steady, with Deloitte reporting that health care organizations vary significantly in their AI investments. But the enterprise has embraced AI with open arms, leveraging it to automate costly back-office and customer-facing tasks. Over a quarter of all AI business initiatives are already in production and more than a third are in the advanced development stages, an IDC survey found. And just over half of businesses said they would spend $500,000 to $5 million on AI initiatives in 2021, up from 34% in 2020, according to Appen.

But these sectors face challenges as AI systems come under greater scrutiny. While 22.7% of employees feel AI will start to have a large impact on their industry within the next 1 to 2 years, 54% are either moderately or very concerned that AI will negatively disrupt their job, according to a 2021 Reign survey. AI isn’t a silver bullet, moreover — as research reveals. In a recent report, only 10% of company managers reported significant financial benefits from their AI investments. And an MIT taskforce predicts technologies like fully autonomous cars won’t arrive for at least 10 years.

Runway

As an expanding cohort looks to cash in on the continued AI investment boom, OECD’s report presents evidence that there’s plenty of runway. That’s despite the fact that some startups are duplicitous about their use of AI technologies. In a 2019 study by MMC Ventures, 40% of purported AI startups in Europe — 2,830 — were found to not use any AI in their products.

A Forbes piece notes that over the past decade, total funding and the average round size for AI companies have risen at a reliable pace. In 2010, the average early-stage round for AI or machine learning startups was about $4.8 million. In 2017, total funding increased to $11.7 million for first-round early-stage funding — a more than 200% uptick. And in Q2 2021, AI startups attracted a record of more than $20 billion in funding, despite a drop in deal volume.