2024 to reveal the companies ‘swimming naked’ on AI boom, says Telstra Ventures

The venture capital sector is set to rebound this year thanks to the AI boom, but Telstra Ventures says picking winners won’t be easy as investors navigate the biggest tech hype in years.

Telstra Ventures managing director Mark Sherman says the rise of AI is an “exciting time for investors”.

The venture capital sector is tipped to rebound this year after a torrid 18 months, thanks to the generative AI boom, according to one of Australia’s leading funds.

But Telstra Ventures says the recovery is far from guaranteed, warning funders need to carefully navigate the technology’s hype, which is expected to last at least two years and be punctuated by successes and many failures.

Telstra Ventures managing director Mark Sherman said 2024 will be a “pivotal year”, exposing which companies have been “swimming naked” as the tide begins to go out on the AI gold rush.

“While AI presents an ocean of opportunity for companies, consumers, and investors, 2024 will be a revealing year for the technology,” he said.

“AI will continue to be the main attraction for American VC investing in 2024, but we’re at the beginning of a years-long hype cycle that will separate viable companies from those that are swimming naked.

“The most pressing question now is which companies will be able to harness the power of AI to offer commercially viable solutions.”

Telstra Ventures managing director Mark Sherman.

Generative artificial intelligence – the ability to perform a range of tasks via simple verbal prompts – has been hailed as the biggest workplace transformation in decades, eclipsing the launch of internet, mobile and social media.

Bosses at Australia’s biggest companies say it is one of the few levers at their disposal to lift flatlining productivity and help tame inflation, according to The Australian’s 2024 CEO Survey.

Mr Sherman said while the rise of AI is an “exciting time for investors”, picking winners will not be an easy task, particularly as the world’s biggest tech companies – Microsoft, Google and Meta – invest billions of dollars in the technology to maintain their dominance.

“Navigating 2024 won’t be easy or straightforward for VCs, but investors who do it well will be rewarded,” Mr Sherman said.

“Start-ups that want to offer generative AI solutions for specific product categories will struggle to compete with larger companies that can simply add these solutions to their existing products.

“The start-ups that are capable of leveraging AI to innovate on business models or generating valuable differentiated datasets will have a shot at securing market share and exiting, but these are difficult tasks as companies pour resources into AI.”

Mr Sherman said start-ups offering a niche solution were likely to be more successful, “especially if they use existing datasets intelligently and creatively”.

“It’s already clear that AI will completely transform business processes, content creation, customer experiences, and many other fields. But the move to implementation isn’t so obvious.

“One central question for VCs is how AI will be integrated into product portfolios, operations, data analysis and decision-making, and a wide range of other processes.

“We will likely see a profusion of vertical-specific AI solutions in 2024 as companies find ways to leverage the technology for their specific purposes. The most successful companies will innovate on existing business models while taking advantage of differentiated datasets.”

In the past three months, Telstra Ventures has backed companies offering niche AI uses. It led a $US25m funding round for Israeli-based Tabnine – which has created the first AI-powered assistant for software developers – with Atlassian and other investors. Telstra Ventures has also backed Cranium, a start-up spun out of KPMG that provides software to companies to ensure their AI systems are compliant and secure against hackers.

The generative AI boom – which ChatGPT sparked in mid 2022, amassing 100 million users within two months of its launch – comes as the number of VC deals almost halved in the fourth quarter of last year versus the same period in 2021.

Meanwhile, global VC funding dived to $US445bn ($651bn) last year from $US681bn in 2021, amid a perfect storm of higher interest rates and overseas banking turmoil – turbulence that resulted in the collapse of Silicon Valley Bank and Credit Suisse.

Mr Sherman said fundraising recovered in 2023, driven by start-ups in AI and sustainability-themed investment.

“We should expect this recovery to continue into 2024, with modest increases in deal volume and total fundraising, as well as a few more unicorns than we saw in 2023.”

But he said the outlook remained “mixed”, citing global economic instability. “While inflation has fallen in recent months, interest rates remain at recent highs; the IMF (International Monetary Fund) is forecasting a growth slowdown in 2024 to a rate well below historical averages,” Mr Sherman said.

“And the threat of recession can’t be dismissed. While there are a few positive signs – such as a strong labour market – VCs will be especially focused on indicators of financial health like cash burn and overhead instead of emphasising growth at all costs.

“It’s also likely that VCs will demand more attractive deal terms, such as participating preference shares, liquidation preference multiples, and guaranteed dividends.”

Mr Sherman said VCs must find a balance between the pursuit of “unprecedented investment opportunities” in fields like AI and the management of difficult economic circumstances.

“A recession could open up new avenues for investment as an influx of top-tier talent pours into growing tech fields, but prices remain depressed. Some valuations will be in the stratosphere, while others will be far too low.

“These are just a few of the reasons why 2024 will be such a pivotal year for VCs – even as risks abound, investors will be positioning themselves for robust growth in the years to come.”