Average funding for AI startups increased by 66%, Startups 100 Index data reveals

Average funding for AI startups has increased by 66% between 2021 and 2023, according to data from the Startups 100 Index.

In 2021, average funding for AI startups was £5,340,750. Despite the challenges presented by post-pandemic recovery and high inflation, funding rose to an average of £8,587,727 in 2023.

Startups 100 Index data also found that turnover revenue for AI startups rose by 77%, representing a huge increase from £1,222,512 in 2021 to £5,040,280 in 2023.

Now in its sixteenth year, the Startups 100 Index is the UK’s longest running ranking of the most innovative and disruptive startups in the market. Reflective of the startups landscape, the Startups 100 Index has seen the number of new AI enterprises ranking increase by 45% over the last two years.

As artificial intelligence becomes increasingly normalised, the data indicates startups are taking an active role in innovating the technology.

When compared to other sectors represented in the Startups 100 Index, AI has the second highest average funding. AI trails behind the tech sector, which in 2023 received an average funding of £10,643,376.71.

Nevertheless, the AI sector has grown at a faster rate than the tech sector. In the past two years of Startups 100 data, average funding in the tech sector only grew by 36.42%.

Competing for resources against the big guy

While the numbers spell good news for the future growth of AI startups, when compared against larger AI enterprises, the central role of startups in the AI revolution is not as clearcut.

According to data from the Department of Science, Innovation and Technology (DSIT), 88% of the AI business population in the UK is made up of small (10-49 employees) or micro (1-9 employees) businesses.

However, despite representing a sizable majority of the AI business population, small and micro entities only make up 28% of AI’s economic contribution. On the other hand, 71% is generated by large firms.

These stats alongside Startups 100 data suggest that while investors are placing more trust and money in AI startups, there is still a noticeable preference for larger and more established companies overall.

To understand this discrepancy, Startups spoke to Sprout.ai, an AI insurance claim company and a 2023 Startups 100 Index alumni.

“I don’t think that specifically AI is suffering from any funding problem,” says Roi Amir, CEO of Sprout.ai. “People want to invest in it and want to fund it but the challenge we have in the industry today across the board is there is generally less funding.”

“There are VCs and they have funds to deploy but the lack of stability and predictability makes them much more cautious and much more conservative,” explains Amir. “What we see is that the investment community in general becomes much more conservative, looking for measurable outcomes, and market proof points before investing.”

However, just like in politics, conservatism is not permanent. According to Amir, what the market is currently experiencing is a pendulum effect, going from high levels of investing before the pandemic to the more extreme conservatism of today. Eventually, it’s expected the market will correct itself and swing back to a balance where businesses find it easier to raise funds.

However, for Rafie Faruq, CEO of Genieai.co, an AI legal assistant and 2023 Startups 100 Index alumni, it’s not just a matter of the macroeconomic climate.

“I think a major issue is access to data,” explains Faruq. “Big businesses have strict data privacy requirements so if a startup is selling to a big business, they need to have information security systems like ISO 27001 or SOC 2, and that is difficult to obtain.”

Sales cycles also pose a challenge for startups. “To sell to big businesses is a year,” Faruq continues. “You have to go through information security, compliance, legal and a whole lot. And that’s why big businesses do better because they can just survive the painful sales cycles.”

However, despite the challenges posed by the macroeconomic climate and data access hurdles, Faruq confesses that VCs are still open to investing in startups.

Drawing the lines of AI policy

Besides funding, policy and regulation could have a big impact on how startups influence the future of AI technology.

The government presented its AI whitepaper back in April, which promised to avoid heavy-handed legislation. However, the UK is enmeshed in a policy race as it works to become a leading voice in the international AI conversation.

As the UK drafts regulations, SME experts say it’s crucial to democratise AI so that startups and small businesses can play a key role in developing the technology.

“We need to keep this space accessible, not a technobabble filled arena that only high-tech giants or corporate innovation teams can use,” emphasises National Chair for the Federation of Small Businesses (FSB) Martin McTague. “The small business community should be competitors, not spectators in the digital race.”

The AI industry contributed £3.7bn to the UK economy in 2022, and currently, over 50,000 people worldwide work in the AI industry. Any statutory regulations set in place by the government will be heavily consequential.

When talking to Startups, Faruq had just returned from an All-Party Parliamentary Group meeting. “There were, I think, no startups there and pretty much no machine learning engineers or academics. It was all policymakers and political scientists which was a bit worrying to me,” confesses Faruq.
“I think you need to hear the voice of people who are on the cutting edge of creating new products, new services, and then you need that pool to be diverse in terms of socio-economic background, gender diversity and every other form.”

Also key is access to funding. As Faruq points out, the existing grant programme for startups is bound by red tape.

SproutAI CEO Amir also notes the importance of revising regulations that exist around investments made by pension funds. “One of the challenges in the UK is that pension funds are not involved so much in supporting the tech ecosystem, so they’re not investing a lot in VC or in a private equity firm to support growth of companies,” he explains.

“If you look at it, compared to the £4 trillion that are in the pension funds, they’re investing less than £200 billion per year in growth, and the reason they’re doing that is that there is a lot of regulation and risk mitigation factors that force them to invest in very traditional and very secure assets.”

Therefore, Startups 100 data suggests that AI startups are performing a balancing act on two separate tightropes – the macroeconomic climate and the future regulations. The former is often largely unpredictable and cannot be controlled by one single actor. The latter, however, is up to the government and policy makers.

Giving startups a seat at the policymaking table will be key in transforming the UK into an AI powerhouse.

** Startups 100 data collected historical data from the 2021-2023 Startups 100 Index, representing a sample size of 200 startups in the UK.