A Blog by Jonathan Low

 

Mar 6, 2024

AI Search Startup Challenging Google Confirms VC's Bet On Valuation Premium

Not only is more venture funding going to AI and Gen AI startups challenging incumbents once thought invincible, but valuation premiums appear to be rising, suggesting that investors believe the growth trajectory has further to expand. JL 

Berber Jin and Miles Kruppa report in the Wall Street Journal:

An AI startup challenging Google’s dominance in web search is finalizing new funding at $1 billion, doubling its valuation since its recent financing a few months ago. The back-to-back funding rounds for Perplexity hark back to the startup boom of a few years ago. Venture capitalists think AI could challenge Google’s grip over search and breathe new life into startups. While Google controls 90% of search, its efforts to expand into generative AI have stumbled, emboldening competitors. Investors are betting AI could enable startups to challenge incumbents from healthcare to online gaming. Funding for generative AI increased nearly fivefold last year.

Perplexity, an artificial-intelligence startup aiming to challenge Google’s dominance in web search, is finalizing a new funding deal at around a $1 billion valuation, people familiar with the matter said, roughly doubling its valuation since its most recent financing a few months ago.

The funding frenzy for the one-year-old startup is a remarkable example of the enthusiasm among some venture capitalists who think AI technology could challenge Google’s yearslong grip over search and breathe new life into startups after a bruising couple of years.

Perplexity, co-founded by Chief Executive Aravind Srinivas, uses advanced AI models to provide direct answers to search queries, as opposed to a list of website links, something Google is also working on.

Past efforts to dislodge Google in search haven’t gone so well. 

 has struggled to make a dent in Google’s search dominance after releasing a new version of its Bing search engine powered by large language models. The search startup Neeva, which operated a product similar to Perplexity, shut down this past year after failing to gain enough traction.

 

Even so, Perplexity is growing fast. The company recently surpassed $10 million in annual revenue, a person familiar with the matter said. Visits to its mobile and desktop app grew 8.6% in February to around 50 million users, according to preliminary estimates from the data service 

While Google controls 90% of the search market, its efforts to expand into generative AI have stumbled as of late, emboldening competitors. In February, the company’s Gemini chatbot angered users by producing ahistoric images and blocking requests for depictions of white people. The controversy led Chief Executive Sundar Pichai to tell staff that the company was making structural changes in response.

The current Perplexity financing is being led by Daniel Gross, a former partner at the venture firm Y Combinator who now runs his own investment fund, the people familiar with the deal said. Gross was an early adviser to Srinivas when he launched Perplexity. 

It comes just two months after Perplexity said it had raised $74 million in a deal valuing the startup at $520 million. That round, which was the largest sum raised by an internet-search startup in recent years, drew backing from 

 former CEO Jeff Bezos and the venture firm Institutional Venture Partners.

The back-to-back funding rounds for Perplexity hark back to the startup boom of a few years ago, when ultralow interest rates fueled a fast-and-loose spending strategy among venture firms. The startup sector has cooled significantly since then.

Venture capitalists have turned their attention to AI, specifically the large language models powering chatbots like ChatGPT. These investors are betting that the technology could enable startups to challenge incumbents in areas ranging from healthcare to online gaming. Funding for the generative AI sector increased nearly fivefold last year.

Google has also developed its own AI-powered search tool, which is distinct from Gemini, that distills web results into summaries and allows users to ask follow-up questions, but it hasn’t yet rolled it out widely.

Perplexity’s search tool answers user queries with a detailed summary and links to where it pulled the information. Users are then able to ask follow-up questions. The company has seen an uptick in subscribers of its premium service, which charges $20 a month for a more powerful version of the search engine that uses GPT-4, OpenAI’s most advanced AI model.

2 comments:

thomasfrank said...

I am excited to see how this plays out. Google has dominated web search for so long, but it seems AI could be the contexto key to unlocking new opportunities for challenger startups.

Florence Pugh said...

This chart is interesting because it shows a clear increase in venture funding for AI startups. The fact that Perplexity's valuation doubled in just a few Retro Bowl College months reflects the growing investor confidence in this area.

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