The largest companies in the cloud infrastructure are narrowing their investments, focusing their attention on AI, security and automation for what analysts project will be a relatively lean year for venture funding.
The venture arms of Microsoft, Amazon, and Google, like much of the venture space, are expected to be pickier than ever in 2023 and looking to fund startups that feed into their core business.
This speaks to the larger trend in venture funding around cloud infrastructure: safer bets on proven entrepreneurs who can help enterprises cut costs or work faster.
“Everyone has gotten more cautious,” Umesh Padval, a venture partner at Thomvest, said. “When times are tough you need to be scrappy.”
Smaller checks and getting 'scrappy'
Global venture funding dropped 35% from 2021 to 2022, down to $415 billion from $638 billion, according to Elif Yayla, a senior intelligence analyst for CB Insights. That’s still up from the $297 billion of 2020, she noted.
“Investors are still very much active, they’re just signing smaller checks,” she said.
Padval, who specializes in cloud and security companies, said he remains bullish on cloud infrastructure and is focused on areas like devops, software development and infrastructure as code.
Microsoft started off the year with the biggest splash: investing in a multi-year, multi-billion-dollar deal with OpenAI, the company that created the popular AI-powered chatbot, ChatGPT. Microsoft will use OpenAI’s tools across its various cloud-based services in a hopes of giving Amazon, Google, and other cloud providers a run for their money.
It comes, however, as the company more broadly and its venture arm, M12, is doing some belt tightening. Michelle Gonzalez, Corporate Vice President and Global Head of M12, wrote this month the firm has developed a “more focus investment strategy” that aligns with Microsoft’s needs around AI, cloud, cybersecurity, developer tools, and vertical services as a service offerings.
“You might say we’ve leaned into the “M” of M12, where we tap more into Microsoft and the power of its network,” Gonzalez said.
Enterprises in every field want to cut labor cuts, which are a main driver of cloud costs, Padval said. AI tools won’t replace developers, but could help supplement the work being done and automate some processes, he said.
What are Amazon, Google and Microsoft funding?
M12 has funded 16 cloud infrastructure companies, including CloudSimple, which was acquired by rival Google in 2019. M12 in November joined other firms on a $10 million investment in Private AI, which develops privacy tools with machine learning and natural language processing.
GV, Google’s venture arm, earlier this month put $100 million into Chronosphere, which helps companies keep an eye on their cloud-based application and is trying to unseat rival Datadog in observability service. The last time GV made a similar investment in a cloud company was late September, when it joined five other investors on a $50 million funding round for company Flatfile.
Amazon’s Alexa Fund and Amazon Industrial Innovation Fund, a $1 billion fund launched in April, have been far less active in cloud lately. Alexa was meant to invest in AI startups, while the Industrial Innovation Fund was started to invest in warehousing and logistics, according to their websites.