A New Area of A.I. Booms, Even Amid the Tech Gloom – The New York Times

More than 450 start-ups are now working on generative A.I., by one venture capital firm’s count. And the frenzy has been compounded by investor eagerness to find the next big thing in a gloomy environment.

Michael Dempsey, an investor at the venture firm Compound, said the tech downturn — which last year included a crypto crash, poor performing stocks and layoffs at many companies — created a lull among investors.

Then “everyone got excited about A.I.,” he said. “People need something to tell their investors or themselves, honestly, that there is a next thing to be excited about.”

Some worry the hype around generative A.I. has gotten ahead of reality. The technology has raised thorny ethical questions around how generative A.I. may affect copyrights and whether the companies need to get permission to use the data that trains their algorithms. Others believe big tech companies such as Google will quickly trounce the young upstarts, and that some of the new companies have little competitive advantage.

“There are a lot of teams that don’t have any A.I. competency that are pitching themselves as A.I. companies,” Mr. Dempsey said.

The start-up had helped fund an open source software project that quickly built image-generating technology that operated much like DALL-E. The difference was that while OpenAI had only shared DALL-E with a small number of testers, Stability AI’s open source version — Stable Diffusion — could be used by anyone. People quickly used the tool to create photo-realistic images of everything from a medieval knight crying in the rain to Disneyland painted by Van Gogh.

In the ensuing excitement, Eugenia Kuyda, founder and chief executive of chat bot start-up Replika, said in an interview that she was contacted by “every V.C. firm in Silicon Valley,” or more than 30 firms. She took their calls but decided against additional funding because her company, founded in 2014, is profitable.

“I feel like the person who was a week early arriving at the airport for a flight — and now the flight is boarding,” she said.

Character.AI, another chat bot company, and You.com, which is adding chat technology to its internet search engine, have also been deluged with interest from venture capitalists, the companies said.

Sharif Shameem, an entrepreneur who built a searchable database for images created by Stable Diffusion in August called Lexica, said his tool rapidly hit one million users — a sign he should shift from his existing start-up to focusing on Lexica. Within a few weeks, he raised $5 million in funding for the project.

Mr. Shameem compared the moment around generative A.I. to the advent of the iPhone and mobile apps. “It feels like one of those rare opportunities,” he said.

Mr. Jaffe of Insight Partners said his firm has since encouraged most of its portfolio companies to consider incorporating generative A.I. technology into their offerings. “It’s hard to think of a company that couldn’t use it in some way,” he said.

Radical Ventures, a venture firm in Toronto, one of the global centers of A.I. research, was created five years ago specifically to invest in this kind of technology. It recently launched a new $550 million fund dedicated to A.I., with more than half of its investments in generative A.I. companies. Now those bets look even better.