Investments in generative artificial intelligence (AI) startups are capturing a significant share of the total venture capital directed towards cloud companies, with these innovative firms receiving around 40% of all funding, as reported by venture capital firm Accel. In their annual Euroscape report, which delves into pivotal trends in cloud computing and AI, Accel forecasts that venture capital investments in cloud startups across the U.S., Europe, and Israel are expected to reach a staggering $79.2 billion in the current year, with AI being a major catalyst for this resurgence.

The report reveals that the venture capital influx into the cloud sector has seen a yearly increase of 27%, marking the sector's first growth in three years. In 2023, cloud startups in Europe, Israel, and the U.S. successfully raised $62.5 billion, according to Accel's findings. This represents a 65% increase from the $47.9 billion that cloud companies garnered four years prior.

This surge in funding comes on the heels of OpenAI, the Microsoft-backed entity responsible for the popular generative AI chatbot ChatGPT, securing a colossal $6.6 billion in funding earlier this month, which valued the startup at an impressive $157 billion.

Philippe Botteri, a partner at Accel, stated in an interview, "AI is dominating the conversation in the cloud sector, both in the public and private markets." As of September 30th, the Euroscape index, which is a curated selection of publicly-listed cloud companies from the U.S., Europe, and Israel, has seen a year-over-year increase of 19%. However, this growth is overshadowed by the 38% rise observed in the Nasdaq this year and is a significant drop from the index's peak of 39% in 2021.

The cloud industry, beyond the realm of AI, has been facing challenges, with enterprise software budgets being constricted by macroeconomic and geopolitical risks. Botteri commented on the pervasive uncertainty, noting that businesses are increasingly concerned about geopolitical tensions and macroeconomic factors that impact software spending priorities. This year, none of the companies in Accel's Euroscape index have reported a revenue growth exceeding 40% annually, contrasting with 23 businesses that achieved this milestone in 2021.

Botteri noted that IT budgets are gravitating towards AI, which is still experiencing modest growth but at a slower pace, year over year. He added, "A portion of the budgets is being allocated to generative AI, for developing new applications and testing these innovative technologies, which leaves less for other areas."

According to Accel's Euroscape report, the top six generative AI companies in the U.S., Europe, and Israel have accounted for approximately two-thirds of the total funding raised by all generative AI startups. OpenAI has raised a dominant $18.9 billion in the 2023-24 period, securing the majority of the venture capital directed towards U.S.-based generative AI companies. Botteri remarked on OpenAI's rapid trajectory to over $3 billion in revenues, highlighting it as one of the fastest-growing software companies of all time.

Anthropic secured the second-largest funding sum among U.S. generative AI startups, with $7.8 billion, followed by Elon Musk's xAI in third place. In Europe, the most significant funding amounts were directed towards Britain's Wayve, France's Mistral, and Germany's Aleph Alpha.

Globally, companies that are developing foundational models, which are the backbone of many of today's generative AI tools, account for two-thirds of the overall funding for generative AI firms, as stated by Accel. The U.S. leads the world in terms of regional generative AI investment, with approximately 80% of the $56 billion total investment in generative AI firms globally over the 2023-24 period flowing into U.S.-based firms.

Tech giants such as Amazon, Microsoft, Google, and Meta are each investing a staggering average of $30 billion to $60 billion annually in AI. While AI "majors" like OpenAI, Anthropic, and xAI are investing billions in the technology, smaller challengers including Cohere, H, and Mistral are investing tens to hundreds of millions per year.

Dev Ittycheria, CEO of database company MongoDB, pointed out in an interview on "Squawk Box" that the concentration of the most powerful AI models is likely to consolidate among a select few players capable of attracting the necessary capital to invest in data centers and chips for training and operating their systems. He stated, "Access to capital will profoundly impact the performance of these models. My bet is that over time, the number of model providers will decrease significantly, potentially to just one or two."