It’s clear that 2023 was an extraordinary year for technology, in large part thanks to what we’ve seen coming from AI startups and research. Platforms like ChatGPT, DALL-E and Midjourney captured the imagination of consumers, developers and investors alike. Australia, thanks to its world-class developer talent, has a real shot at producing generational AI businesses. I personally have never felt more excited to be a technologist.

An overnight success, decades in the making

Over time AI has seen hype cycle after hype cycle accompanied by expectations that were often greater than what the technology could deliver.

In 2023 (and late 2022) ChatGPT became a global phenomenon, in part because it felt as though we were finally seeing some of AI’s true potential come to life.

This inflection point is not merely another hype cycle. It represents the culmination of decades of research, data proliferation (thanks to the open internet) and growth in computing power. These three factors have been severe limitations for the progression of AI’s capabilities.

It’s not just generative AI that’s seeing breakthroughs, either. Truly autonomous vehicles now roam the streets of San Francisco and are able to be booked as easily as one books an Uber. AI-enabled drones deliver food in Canberra and Brisbane. We are living in the future we were promised.

The Australian ecosystem

There’s much disgruntlement about Australia’s missed potential as an AI powerhouse among experts, especially since the disbanding of the early NICTA group and the overseas departure of some of Australia’s most credentialled AI researchers. Fortunately, Australian developers are well-positioned and excited to make up for lost progress.

The barriers to building with AI have been rapidly diminishing and the skillset required to build an excellent AI-enabled product have changed. Speaking to researchers at OpenAI, they find that team members who join with software engineering skills are better equipped to learn AI than researchers who try to learn software engineering skills.

Australia has world-class software engineers, many of whom are currently rapidly upskilling in AI.

Beyond startups, enterprises are taking to building AI solutions with fiendish excitement. Whilst many enterprises have started to understand the difficulty of productionising AI models, an ecosystem of support players (consultancies, developer studios and cloud hyperscalers like Google and Amazon) have been investing significantly to support them. An increased level of comfort and familiarity with AI from enterprises will be a huge revenue driver for the startup sector, as enterprises have both the deep pockets and excitement to implement AI.

What to expect in 2024

Investors this year were simultaneously extremely excited by AI and very wary about investing in the wave of AI companies being founded. Many continue to feel a degree of anxiety about evaluating the longevity of these businesses in a space that’s moving faster than any other we’ve seen.

In the year to come, I expect to see more investors find comfort in investing in these new products, but with an increase in scepticism due to:

1) the number of businesses founded to solve very similar problems; and
2) the number of fast failures or quick pivots being seen in these businesses that are struggling to find sound footing amidst the change.

There may also be some cooling of the sky-high valuations seen for AI companies as scepticism rises and investors become more conscious of the difficulty of raising new venture funds in this macroeconomic environment.

Increasingly AI-savvy investors are talking about their interest in AI businesses that combine the technology with deep domain expertise to solve a specific problem that’s difficult for larger players to fast follow. We’ll also see more cross-modality and multi modal applications and more developers moving away from building purely on OpenAI’s architecture to more tailored, open-source alternatives.

You can access the complete The State of Australian Startup Funding Report here. The State of Australian Startup Funding Report 2023 is brought to you by Cut Through Venture and Folklore Ventures, and offers the largest data set in examining the local funding landscape. With contributions from 1,000s of individuals and companies, the 2023 report was released in February 2024.