Record sales of AI chips have seen Nvidia become a big fish in the Big Tech world. For semiconductor start-ups, that means investors are getting left out in the cold.
Nvidia’s supremacy in making computer chips for artificial intelligence (AI) has left venture funding cold for potential rivals, with the number of US deals falling 80 percent in the quarter from a year earlier, investors said. .
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The Santa Clara, California company dominates the market for chips that deal with massive amounts of language data.
Generative AI models become progressively smarter as they are exposed to more data, a process called training.
As Nvidia has grown stronger in this field, the more difficult it has become for companies attempting to make competing chips. Venture financiers are unwilling to provide large sums of cash, seeing these startups as a risky bet.
It can cost more than $500 million (€466 million) to advance a chip design to a working prototype, so the pullback immediately jeopardizes the startups’ prospects.
“Nvidia’s continued dominance has made it clear how difficult it is to enter this market,” said Greg Reichow, partner at Eclipse Ventures.
“This has resulted in a reduction in investment in these companies, or at least in many of them”.
Start-up deals and investments below
US chip start-ups have raised $881.4 million (€821.4 million) as of the end of August, according to PitchBook data. This compares with $1.79 billion (€1.6 billion) for the first three quarters of 2022.
The number of deals has dropped from 23 to four by the end of August.
Nvidia declined to comment.
AI chip start-up Mythic, which has raised a total of about $160 million (€149 million), ran out of cash last year and was almost forced to halt operations, technology website The Register reported.
But it managed to bring in a relatively modest $13 million (€12 million) investment several months later in March.
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Mythic CEO Dave Rick said Nvidia has “indirectly” contributed to the overall AI chip fundraising crisis, as investors want “large-scale, home-grown investments with huge returns.”
Difficult economic conditions have exacerbated the downturn in the cyclical semiconductor industry, Rick said.
A secretive start-up called Rivos, which is working on chip designs for data servers, has had trouble raising funding recently, two sources familiar with the company’s situation said.
A spokesperson for Rivos said that Nvidia’s market dominance has not hindered its fundraising efforts and that its hardware and software “continue to excite our investors”.
Rivos is embroiled in litigation with Apple, which has accused Rivos of stealing intellectual property, adding to the challenge of fundraising.
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investors demand
Chip start-ups looking to raise cash are facing tough demands from investors. Sources said companies will have to have a product that is within a few months of launch or is already selling.
About two years ago, new investments in chip startups often amounted to $200 million (€186.4 million) or $300 million (€280 million). According to PitchBook analyst Brendan Burke, it has fallen to around $100 million (€93 million).
At least two AI chip start-ups have overcome investor reluctance by fostering their relationships with potential customers or well-known executives.
In raising $100 million (€93 million) in August, Tencent boasted CEO Jim Keller, a renowned chip architect who has designed chips for Apple, Advanced Micro Devices and Tesla.
D-Matrix, which projects revenue of less than $10 million (€9.3 million) this year, raised $110 million (€102.5 million) last week, which includes financial backing from Microsoft and a loan from the Windows maker to test D-Matrix. Strengthened by commitment. New AI chip due to launch next year.
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While these chipmakers struggle in Nvidia’s shadow, startups in AI software and related technologies do not face the same hurdles. According to PitchBook data, they brought in about $24 billion (€22 billion) in funding as of August this year.
Despite Nvidia’s dominance in AI computing, the company does not have an infallible lock on the field. AMD plans to launch a chip this year that will compete with Nvidia, and Intel has gotten a jump on development by acquiring a rival product in an acquisition. Sources see these as having long-term potential to become an alternative to Nvidia’s chips.
There are also adjacent applications that may provide opportunities for competitors. For example, chips that perform data-intensive computing for predictive algorithms are an emerging niche. Nvidia does not dominate this sector and it is worth investing in.
