Last year, AI-related startups raised nearly $50 billion. But if we look at who received that money, we’ll see that a significant portion of this sum went to investments in technology giants.

For example, Microsoft invested $10 billion in OpenAI, funding that accounts for a fifth of the total investment in the sector. We are witnessing a serious battle among technology giants for a leading position in the AI market.

Dmitry Smirnov, founder and partner at Flint Capital

The simple times related to AI are gone.

More areas have become the domain of these market leaders. Today, if a company solely focuses on making an AI interface, it stands no chance for a normal multiplier. An ordinary startup can only achieve serious success in this field if it is doing something so impressive that one of these giants notices it and acquires it.

Does this mean that investments in AI startups are slowly becoming a thing of the past? Surely not.

So, which areas hold the biggest promise and keep alive the hope that a startup will eventually become a unicorn?

Sustainable businesses

For an AI-powered company to have real prospects for high valuations, it is essential to have a solid core business where AI has been applied to enhance the firm’s products, user experience and financial performance.

This involves first integrating AI into the product lineup; without it market share is lost to competitors.

Second, it’s about increasing the company’s operational efficiency by cutting costs on certain tasks previously done without AI, but with the use of AI are elevated to another level. If a company quickly understood this and integrated AI into its business operations, it already gained an advantage over its competitors.

Companies supporting AI implementation

The recent mega-valuations of Arm and Nvidia, as well as Sam Altman’s plans to create the largest fund to support the semiconductor industry, confirm the prevailing thesis: Don’t invest in AI, invest around AI.

If we look at the valuations of companies, we can clearly see that the highest valuations so far are not those of companies that are offering AI-powered services as their main product, but those that are facilitating AI implementation — from chip manufacturers to cloud computing, advanced fast databases, and so on. This is a promising direction for startups — if they make AI implementation faster, more convenient and simpler, their services will be in high demand, making them a good target for investment.

Intersection of tech and high multipliers

Since a company becomes a unicorn by attracting $100 million or more, it’s necessary to look for niches where there are prospects for dramatic growth and investors are willing to provide such funding.

In my opinion, promising areas appear to be AI + cybersecurity and AI + healthtech, especially when it involves the collection and analysis of data that a company exclusively owns. Such projects are harder to replicate, which means they have additional value.

And one last thing. So far, we have all been dealing with weak artificial intelligence. But very soon, the era of artificial general intelligence, or AGI, will arrive, and both startups and investors need to prepare for this, as AI will move to another level.

It will be able to interact with customers throughout the entire cycle, manage accounting, independently protect against cyber threats, and more. Most likely, we will see a wave of regulations similar to those in the financial sector.

This will undoubtedly affect the potential and valuations of AI-powered startups, and investors need to keep an eye on this.

Dmitry Smirnov, with 15-plus years of experience in venture capital investments, is the founder and partner of Flint Capital, a Boston-based VC fund that invests in early-stage tech companies across the U.S., Europe and Israel. The firm has had 20 successful exits, two IPOs and three unicorns.

Illustration: Dom Guzman