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The Story: It’s no secret that artificial intelligence is the darling of venture capital investing.

According to PitchBook data, $29.1 billion dollars was invested across 691 generative AI deals in 2023—a 268% increase from the previous year. 2023 saw the artificial intelligence industry receive nearly $50 billion in funding, the second-highest figure in the market’s history.

Last year’s headlines mostly focused on what is known as horizontal AI, which is general-purpose, ubiquitous artificial intelligence that tends to look like large language models such as Chat GPT. These applications are usually a safe bet for venture capital, but investing into them is extremely expensive.

Notable companies to receive big checks include OpenAI ($10B), Anthropic ($7B), and Inflection ($1.3B). And as expected, the big AI startups were funded by the big investors. Microsoft, Amazon, and Google all led multi-billion dollar fundraises for these companies.

Naturally, venture capital firms with smaller budgets missed out on the best of the AI gold rush as their fund sizes couldn’t compete with the bigger players. But another AI opportunity has arisen for firms with fewer assets under management—startups focusing on vertical AI.

In an interview with PitchBook’s Leah Hodgson, Pender Ventures’s partner Isaac Souweine, explained that, “On the horizontal side, it’s an arms race…It’s insanely expensive, and a lot of investors don’t have the capital to place these huge bets. Vertical markets are easier to play in. You can still invest in the AI revolution, but you don’t have to come with a massive mega-fund to do it.”

And startups that make them have become an enticing bet for 2024’s venture markets.

Expert Take: Parker McKee, principal at Pillar VC, thinks the specialized applications of vertical AI “is certainly one of” the biggest investment opportunities that will catch venture’s eye in 2024.

The affordability of vertical applications is what makes them enticing, according to McKee. He says, “The ticket size for a salary is so much larger, often an order of magnitude larger, than what you would just charge for a tool. I think because of that, you’re going to see some really interesting business opportunities emerge and I suspect that VCs will not miss out.”

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