At the start of 2024 our angel investors identified four important sectors that they were most interested in investing in this year. To continue this series, we’ll focus on one of these sectors: artificial intelligence. Because artificial intelligence is vast, and the most significant changes in this field currently are in generative AI specifically, we’ll focus on that for this article.
What is generative AI?
While artificial intelligence (AI) is a term that’s been talked about for decades, recent developments in the technologies that represent AI on a more applied, granular level, including machine learning and generative AI, have catapulted the sector into the limelight, particularly for investors looking for long term growth.
To quote IBM, “generative AI refers to deep-learning models that can generate high-quality text, images, and other content based on the data they were trained on.” It represents a breakthrough in machine learning by which programs passed the point of perceiving and classifying information, and reached the point where they could use that learning to create content themselves.
This breakthrough drew together a number of advances across underlying systems, including large language models (LLM), and developments in natural language processing, and AI has reached a point where it can generate content – from writing articles, to software code, to creating images, and the possibilities for consumers, and for business applications, are only just beginning to be fully realised.
Gen AI and the UK market
The advent of Generative AI came at a particularly interesting time for venture capital investing – right in the middle of a significant reduction in VC investing in the UK, following the record highs of 2021 (£36.8bn).
When GPT-4 – which made headlines internationally for its remarkable capabilities – was released in 2023, the UK was on the verge of recession and VC investing had fallen to around half its 2021 levels.
Despite a global interest in AI investing, and in the potential of AI generally, investment in the UK AI sector was also affected, falling to £1.4 billion in 2023 from a record £2.9 in 2022, according to a report by Beauhurst. The UK’s AI sector still accounted for 11.6% of the overall investment in 2023, but investors could be forgiven for missing its significance to investors in the midst of broader market concerns that impacted investing generally.
By early 2024 things had begun to stabilise, and today, the UK accounts for around half of all AI private capital investment in Europe. AI currently employs more than 50,000 people in the UK, and contributes over £3.7 billion to the economy every year. By 2035, the UK AI market is forecast to grow to over $1 trillion. One recent success story is British AI company Wayve, which secured more than $1.05 billion to develop the next generation of AI-powered self-driving vehicles in the UK.
The UK is also proving to be particularly attractive to global corporations interested in establishing an AI base and investing in infrastructure. In November 2023, Microsoft announced it would invest £2.5 billion over three years to expand its next generation AI datacentre infrastructure in the UK.
In May 2024, AI cloud provider Coreweave announced it would be investing £1bn in the UK, enabling the launch of two data centres, and opening its European headquarters in London. It cited unprecedented demand for AI infrastructure and London’s status as an important AI hub as being behind its decision. US AI data infrastructure company Scale AI, which secured $1 billion in new funding at a valuation of $14 billion in May 2024, selected London as the location for its first European headquarters.
Additional support for the sector via public bodies like UK Research and Innovation (UKRI) is underway in the form of initiatives like Responsible AI, which aims to foster an innovation ecosystem for responsible and trustworthy AI that will be responsive to the needs of society. The UK also established the AI safety institute, the first state-backed organisation focused on advanced AI safety for the public interest.
Overall, global investments in core tech required by AI businesses, global investment in UK AI businesses, and public policy that works to support the industry and establish UK as an AI leader pave the way for the UK to establish itself as a centre for AI innovation and investment, and while 2022 and 2023 were difficult years, the long term potential for AI-powered businesses and products in the UK looks extremely promising for investors and founders alike.
Focusing AI products for profit and the move toward AI B2B
While the vastness of possibility and potential inherent in AI – the sheer breadth of conceivable applications, outputs, and users, never mind those yet to be conceived – is certainly exciting, for many investors, such an untested field with so many variables can be daunting. The technology consumers have seen might be impressive, but how easily can different types of businesses integrate and scale it, what impact will it have on their bottom line, and how much dependance does it have on suitable infrastructure? What about the unreliability of AI results, potential issues around copyright, safety considerations and so on?
These questions have led to specific trends emerging in the AI space, particularly around AI integrations that are seen as simpler, with more straightforward benefits, and importantly, which have a sufficient positive impact on revenue to make them viable.
A recent article in Wired describes how a number of startups that launched AI-powered products found the need to narrow their offering and focus on catering to the needs of business clients in order to generate meaningful revenue. In addition to the higher fees this focus was able to command, it made the training of AI models much narrower, less resource and time intensive, and had the advantage of a clear objective outcome that the product would aim to deliver.
This narrowing of the immense breadth of possible AI applications to focused, premium products for business clients has now become a clear trend, with examples who have made this pivot including Tome, which refocused on delivering presentation building capabilities to sales and marketing teams; Perplexity AI, whose Perplexity Enterprise Pro search engine product is aimed squarely at business users and Sierra, which works to make brand chatbots smarter and more capable. Even the ubiquitous ChatGPT has rolled out ChatGPT Enterprise, with enhanced security features, and also sells cloud access to APIs for developers and companies who want to develop their own products using OpenAI’s language models.
This approach was particularly important over the past few years as a result of the increased difficulty around securing investment funding. The significant expense of running an AI startup with huge computing power requirements has made companies built around a focused output that can generate steady recurring revenue more likely to secure funding. As the Wired article puts it: “A GenAI app that helps a company generate ecommerce sales, parse legal documents, or maintain SOC2 compliance is probably a surer bet than one that drums up a clever video or photo once in a while.” - Source:Wired
What does this mean for UK investors?
While ‘AI’ is a very broad category, and the sheer number of potential applications can make identifying implementations that are scalable and stand to generate profit in the long run a challenge, there is no doubt that AI is a high potential growth area that investors should look at carefully. With the developments in the UK stated above, there is clearly a rapidly developing ecosystem here that is able to attract major corporations and investment, as well as the AI infrastructure needed to enable a growing number of AI-based startups to flourish here.
Investors should do their research around trends in AI implementation. Looking past the glamour of AI for AI’s sake, and more closely at which sectors and business types are able to make the most effective use of AI in a real sense to increase revenue is advisable. Does AI enable that business to do more for a lower cost, does it have a client base ready to pay the fees it commands, and will its revenue be sufficient to offset high computing power costs? In some cases, particularly in very early stage startups, sufficient technical knowhow and a plan for specific applications of AI can mean that businesses will find it easier to grow faster, and become profitable more quickly, at a lower cost. Compare incoming startups to more established businesses that offer similar services with higher overheads, and which potential applications are able to disrupt the market.
A benefit of investing in the UK is its selection of investment vehicles that incentivise investment in startups with a range of tax reliefs. Investment schemes like SEIS and EIS aim to offset what is undoubtedly a high risk investment with significant reliefs across income tax, capital gains tax and inheritance tax, as well as allowing investors to offset the value of companies that fall below their effective cost against their tax bill.
SyndicateRoom's EIS and SEIS products
EIS
SyndicateRoom's Access EIS Fund co-invests with the UK's top performing angel investors to gain access to the most promising early-stage UK startup investment opportunities accross all sectors, on exactly the same terms.
The tax reliefs available through EIS include:
30% income tax relief on up to £1,000,000 invested. This rises to £2m if the first million is invested in knowledge intensive companies (KICs) This relief can be applied to the year shares were issued, or one year prior.
Capital gains tax deferral relief which lets investors defer a gain arising up to three years before and one year after the EIS investment, for as long as they hold their EIS shares.
100% capital gains tax disposal relief which exempts SEIS shares from capital gains tax liability providing they have been held for three years, and income tax relief has been claimed in full.
100% inheritance tax relief on SEIS shares provided they have been held for two years prior to death.
Loss relief on shares that fall in value which can be offset against income tax or capital gains tax.
To find out more about how it works, the companies we invest in, the angels we co-invest with, and how to get started, view our deal page and register by clicking the link below.
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SEIS
SyndicateRoom's new SEIS fund, in partnership with Founders Factory, will focus on investments in pre-seed, B2B SaaS businesses to capitalise on the new opportunities made possible through the implementation of AI technology in early stage businesses.
The tax reliefs available through SEIS include:
50% income tax relief on up to £200,000 invested. This relief can be applied to the year shares were issued, or one year prior.
50% capital gains tax reinvestment relief which grants investors exemption from 50% of the tax due on any capital gain that arose in the year you made the investment when they invest an amount equal to the gain in SEIS shares.
100% capital gains tax disposal relief which exempts SEIS shares from capital gains tax liability providing they have been held for three years, and income tax relief has been claimed in full.
100% inheritance tax relief on SEIS shares provided they have been held for two years prior to death.
Loss relief on shares that fall in value which can be offset against income tax or capital gains tax.
You can find out more about this fund, the SEIS tax reliefs available to investors and make an investment using the link below.
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