While we might have seen a pullback in venture capital investment in 2022, one area where investors are not slowing down is betting on artificial intelligence – specifically directing their investment in companies working with generative AI. According to data from PitchBook, investment in generative AI has considerably increased since 2020. Their data shows a 425% jump from 2020 to now, with $2.1B invested in 2022 alone.

So, what is generative AI that is grabbing investors’ attention?

Generative AI is powerful artificial intelligence that utilizes highly sophisticated computer programs that allow computers to create new content based on previously created content through a process called diffusion. Massive databases are compiled to "train" the AI to create new content similar to the original. The content could be anything from text to art to video content.

You have seen generative AI at work if you have used a popular app to create an avatar from your selfies. The mass popularity of creating these avatars demonstrates the potential for generative AI and why investors are so motivated to invest in this exciting technology. Investors are seeing the possibilities for this technology and hoping to jump in now when these companies are just starting. The content that generative AI can create is truly limitless and could be hugely transformative across numerous industries.

It seems to be the one bright spot right now when we are seeing many other facets of the tech sector struggle with decreasing valuations, canceled IPOs, and a reduced appetite for investment. This could be because it is so novel. It doesn't fit into any other category, so there might be less hesitation to invest in something fresh and new rather than crypto or different tech verticals that have had a roller coaster of a year.

As the technology advances and becomes less expensive and we continue to see it utilized successfully in real-world scenarios, the interest in generative AI is likely to increase even more. As evidenced by the recent infusion of capital in this industry, it is safe to assume that a whole new group of companies will emerge based on generative AI, much like how the app economy was sparked by the mass adoption of smartphones and the cloud computing economy evolved from the mass adoption of the Internet. These new companies will reap the benefits of being early adopters, forming solid relationships with major customers, and receiving patent protection on key aspects of their technology.

Despite the enthusiasm for generative AI, some legal and ethical questions remain unanswered regarding using copyrighted data to train these models. Until these issues are resolved and there is more certainty around the propriety of using certain data, the growth rate in this space may be slowed.

This is an exciting area to watch, and savvy investors are already monitoring this area closely. Founders in this space will need to be ready as the appetite for investment will surely grow.