Sifted - Can open-source AI actually make money?

Good morning there,

If there’s one thing we learned in 2023, it’s that GenAI companies had no trouble raising money. The question is: can they make it?

Several of Europe’s top deals last year went to AI companies that all started out building so-called open-source models — meaning they give the source code out for free; Mistral, Stability AI and Aleph Alpha have all done this as part of their strategies.

But with competitors like OpenAI already topping $1.6bn in revenue from charging customers for access, can the open-source model actually make a viable business? That’s what my colleague Tim Smith and I dig into today.

Elsewhere, the much-debated EU AI Act finally passed, an ex-Atomico partner is raising a new fund and investors reveal the cybersecurity startups you need to have on your radar.

— Anne Sraders, senior reporter

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How will open-source AI companies make money? 

AI startups have proven very good at raising money — in Europe alone, AI and machine learning startups raked in €9bn last year, according to PitchBook — but they’re yet to prove whether they can be equally good at making money. 

Europe’s best-funded AI startups — France’s Mistral, the UK’s Stability AI and Germany’s Aleph Alpha — all started out building so-called open-source AI models, the types of large language models (LLMs) with source code available to be downloaded for free. 

It’s a different approach to US-based titan OpenAI — which manages and licences out its models to companies and individuals, and has already topped a whopping $1.6bn in annualised revenue.

But with VCs funnelling millions of euros into these open-source businesses ($1.3bn raised between just those three in Europe so far), that all begs the question: can they make money?  

My colleague Tim Smith and I decided to ask around and see how some industry participants are thinking this through. Of course, monetising open-source tech isn’t new: software companies (including Google and Microsoft) have been doing this for years to lure more customers to use a core component of their tech and then sell various features and services around it.

“You open source part of the technology so it becomes widely adopted technology that your company is the expert in, and then you can sell a lot of things around that,” says Mike Linksvayer, VP of developer policy at GitHub.

But some are sceptical that giving the pricey tech away for free will make a viable business. Stability AI seems to share those concerns; it recently back-tracked on its open source vision, putting its most powerful models behind a paywall. 

You can dig more into the debate in our story, but I’m curious to hear from the founders out there: Do you use open-source AI models for your business functions, or are you opting for OpenAI? How are you thinking about what tech best fits your business? Send me a line.

— Anne Sraders, senior reporter

💰 Ex-Atomico partner Hiro Tamura is raising a new fund, sources say. Tamura was one of Atomico’s longest standing investors, heading up its investment team and gaining a place on the Midas list of Europe’s best-performing investors in 2021. He left the firm in 2022 — and now six sources tell Sifted that he's out in the market raising capital.

🇪🇺 The final version of the EU AI Act was signed unanimously by all EU governments Friday. Since the deal was negotiated in December — and even though it was legally impossible to reopen it for further talks — some countries (we see you, France, Germany) were trying to make the rules on generative AI models more flexible, threatening they wouldn’t vote for the final version. In the end, the bill passed — the European Parliament still has to vote on the Act this spring. 

• “Many of the new AI rules remain unclear and could slow down the development and roll-out of innovative AI applications in Europe,” the Computer & Communications Industry Association said in a statement. “The Act’s proper implementation will therefore be crucial to ensuring that AI rules do not overburden companies.”

🙂 Does everyone at your startup say they're happy? You may have a problem.

🔐 11 cybersecurity startups to watch, according to investors.

🏢 Data infrastructure 101: Why it matters to your startup. (Sponsored by Aiven).

The money to be made managing other people’s money. In recent years a host of startups have popped up to capitalise on other people’s wealth, but after a booming couple years the so-called wealthtech space has seen funding levels slump, according to Sifted’s latest briefing on the sector.

• And the drop off is quite significant. According to Dealroom data cited in the briefing, total deal value for wealthtech startups fell more than 78% between 2022 and 2023. Startups in the space raised $994.7m last year, compared to 2022’s $4.5bn haul.
• US startups — which have grown faster than their European counterparts — are also finding VC money harder to come by now than they were just a few years back, a disheartening signal to smaller players this side of the pond. It’s a wider fintech problem: 2023 saw the value of deals in the sector plummet 65% in Europe, according to PitchBook data.

💰 On February 13, we’ll be hosting our first Intelligence conference call, digging into exit horizons for 2024 — it's exclusively for Pro subscribers. We’ll share our analysis of the M&A climate and then open the floor, so you can debate the current state of M&A and share your insights. RSVP.

Ghent, Belgium-based Peripass, a SaaS platform that automates yard management for the logistics sector, raised €7.5m in funding from Welvaartfonds.

Galway, Ireland-based CitySwift, which offers a data management platform for public transportation, raised €7m in funding. Gresham House Ventures led the round and was joined by investors including Irelandia Investments, the Western Development Commission and ACT Venture Capital.

Munich-based BOX ID, which has designed networked tracking sensors that create a digital image of an entire supply chain, raised €3.5m in funding. KPN Ventures led the round and was joined by investors including High-Tech Gründerfonds, Bayern Kapital and Wille Finance.

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