Venture capital funding for generative AI startups is on track to exceed 2024’s record-breaking levels. In the first three quarters of 2025, GenAI startups raised over $20 bn, per S&P Global Market Intelligence data, setting up the year to surpass the $22.7 bn raised in 2024. Beinsure Media summarise the key highlights from S&P’s report.
The second quarter saw a major $6 bn deal for X AI Corp., while the third quarter was led by OpenAI, which secured $6.6 bn. Momentum remains high, with Anthropic reportedly planning another round after raising $8.8 bn.
The second and third quarters have been particularly strong, representing the highest quarterly funding totals since Q1 2023, when Microsoft Corp. invested $10 bn in OpenAI.
Competition in Frontier Model Space
New competitors are entering the frontier foundation model segment, including Elon Musk’s X and Ilya Sutskever’s Safe Superintelligence, which has raised $1 bn. At least six such models are currently active in the US and Europe, with more expected to join the market.
Investor interest in GenAI remains strong, particularly for ventures led by experienced entrepreneurs.
However, building foundation models from scratch requires significant capital, and the competitive pressure from larger companies like Alphabet Inc. and Meta Platforms, which can allocate greater resources, remains high.
Despite the high capital expenditure, investors expect considerable revenue growth and view GenAI as a major new technology platform. According to a Stripe report cited by the Financial Times, GenAI startups have reached $30 mn in revenue faster than companies in previous tech cycles, including software-as-a-service.
New Revenue Models for Smaller Model Providers
Smaller foundation model developers are pursuing alternative business models.
Analysts at S&P Global Market Intelligence report that these providers increasingly focus on model tooling, due to challenges in competing with top-tier models and efforts to improve the quality of open-source models.
Firms are heavily investing in building the next generation of GenAI models to avoid being commoditized.
Top-performing models may capture a significant share of the growing market, even though the final size remains uncertain. As the market matures, consolidation or market exit is expected for some participants.
Major Players and Continued Funding
Leading firms such as Meta, Microsoft, and Alphabet continue to invest in GenAI due to competitive pressure. “If you’re a big stack player… you have no choice but to keep raising your bet. If you blink, you’re left empty-handed,” said Sarah Tavel, general partner at Benchmark.
Some startups, such as Inflection AI and Aleph Alpha GmbH, have shifted focus away from the frontier race and now aim to support enterprise adoption of GenAI.
Despite this, many frontier model companies must continue raising funds to compete with well-financed competitors. For example, Anthropic has already raised $8.4 bn and is reportedly seeking another round based on a $40 bn valuation.
Growth in the Application Layer
In 2024, venture funding in the application layer has already exceeded 2023 levels. This segment includes startups that build on third-party models using proprietary data to develop distinct offerings or address specific markets. The challenge is to identify market niches not already addressed by frontier models.
Companies such as Perplexity AI and Ai Search (iAsk) are attracting investment as they show strong revenue growth, with investors betting on a potential disruption to Google’s longstanding lead in search.
Early opportunities for GenAI applications include customer service and software development. Code generation and user experience platforms currently receive the most attention.
S&P analysts note that outsourcing firms may face direct competition from generative AI, potentially reducing demand for traditional human-based services.
Specialization in Vertical Markets
Several startups in the application layer now prioritize deep specialization. James Drayson, CEO of stealth startup Appella AI, stated that the company shifted from general conversational AI to serving fashion e-commerce, aiming to deliver highly personalized shopping experiences.
“The AI space is evolving quickly, so agility and vertical focus are crucial,” Drayson said.
Other companies are exploring sectors like legal and healthcare, where GenAI could boost productivity in complex, regulated environments.
Generative AI in Insurance
The global GenAI in insurance market is projected to grow from $346.3 mn today to $5.5 bn by 2032, with a CAGR of 32.9%. Insurers are adopting AI to improve risk models, streamline operations, and deliver more personalized services.
Generative AI’s ability to create new and relevant content presents new opportunities in the insurance industry. As market conditions shift, consumer expectations are rising.
This year’s underwriting forecasts provide guidance on how insurers can improve responsiveness.
With AI-driven models, insurers can make more accurate recommendations and develop products suited to specific client segments, helping optimize profitability and customer satisfaction. AI can also calculate personalized pricing using behavioral and historical data.
Artificial Intelligence Becomes an Unexpected Risk for Insurance
AI presents emerging risks in traditional insurance frameworks. A recent Munich Re whitepaper outlined how exposures from AI use could create significant and unexpected threats to insurers’ portfolios.
One issue involves pure financial losses. For example, a bank may use AI to extract information from documents. If the AI introduces errors, the extracted data becomes unreliable, requiring human correction and additional costs.
Another risk area concerns discrimination. If AI determines credit limits for applicants and introduces bias, the resulting outcomes may not be covered by standard policies. Such risks highlight the need for insurers to adapt to the growing influence of AI across sectors.