Chloe Ludwig/Pitchbook News
Billions of dollars are flowing into AI video generation, and the market is still in its infancy.
Over the past five years, investment in startups developing AI video and media technologies has more than tripled, according to PitchBook data. This year’s funding has already reached record levels, with $5.6 billion invested, an increase of more than 43% from the 2025 annual total.
Startups building video generation models receive the bulk of their VC funding, with a focus on deep-pocketed companies like Runway and Luma AI. The competition is not over yet, nor is the money, but new parts of the market are starting to gain more attention.
Google DeepMind’s $75 million investment in indie film studio A24 this week is a clear example, with the two companies partnering to develop AI tools for filmmakers. Google’s access to A24’s creative and research shows that the market is opening up for more than just funding the best video generation tools.
“If you compare today’s cutting-edge technology to the technology of three years ago, the difference is honestly astonishing,” says Ziv Reichert, a partner at London-based venture capital firm Local Globe. “But we are still in the early stages and there is still a lot of value to capture.”
This creates a lot of value not only in the tools and software layers, but also in the final product. We are like the jewelers of the AI gold rush. Rather than extracting money like OpenAI or developing tools like voice generation startup ElevenLab, they take money and deliver great products.
Xavier Collins “Wonder”
Reichert said competition among companies building video generation technology is increasing, not just in Western markets. New models coming out of China are competing with products from the United States and Europe, and established companies are also investing in developing their own AI capabilities. The easier it is to build technology and the more options there are, the harder it becomes for creators to be the go-to.
This market reality raises bigger questions. Generating video is no longer the hard part, but where does the value go?
Content as new software
As an asset class historically closely tied to software, studios are not an obvious choice for VC investment, but they are gaining traction.
A handful of AI-native or AI-powered studios have emerged to take on Hollywood and are raising money from investors. California studio Promise has raised funding from backers including Andreessen Horowitz and Google’s AI Futures Fund. Venture capital firms including Atomico and Local Globe invested in London-based Wonder’s $12 million round.
”[AI video] “We’re moving from a frontier model to tools, and the next wave will be IP and distribution. There’s going to be a lot of value in the end product, not just the tools and software layer,” said Xavier Collins, co-founder and CEO of Wonder. We are like the jewelers of the AI gold rush. Rather than extracting money like OpenAI or developing tools like voice generation startup ElevenLab, they take money and deliver great products. We’re definitely out of the box for many VCs, but the VCs we spoke to saw great business potential. ”
The AI movie studio’s investments are in intellectual property. Catalogs of movies and television series earn recurring revenue through licensing, franchises, and distribution deals. Your catalog grows in value over time as new distribution platforms and markets are developed and your content is purchased, providing passive income without additional production investment.
AI is also expected to significantly reduce film budgets by automating workflows and reducing key expenses. Studios like Wonder and Promise can deliver more content faster and cheaper than traditional studios, changing the economics of IP ownership.
AI-powered studios will also become more attractive to brands, allowing them to produce advertising campaigns on shorter timelines and at lower costs.
video, revisited
Beyond content, investors are starting to support a more fundamental shift in video itself, from something you watch to something you interact with.
“In terms of future features, I think development will pivot toward interactive things,” said LocalGlobe’s Reichert. “I’m excited to create a unique and playable experience.”
Last month, San Francisco-based Reactor raised $59 million in a round led by Lightspeed Venture Partners. The company is building an interactive video infrastructure that responds to user input in real time and is already working with customers across media and entertainment.
Runway, one of the first companies to develop AI video generation, is making similar bets about the direction of innovation. According to COO Michelle Kwon, the company is focused on real-time video and immersive experiences, especially in terms of customized learning and customer service.
Also expanding into global models, Kwon believes visual media is the key to unlocking next-generation technology.
“Expression and storytelling are the cornerstones of video, but we have broader ambitions,” she said. “LLM’s unprecedented growth shows how innovative generative technologies can be at its core, and highlights how much more is possible when we think about multimodality. To build powerful world models, we need powerful video generative models.”
room for more
There may not be a single answer to the question of where the value will lie in the maturing AI video market. Studios, infrastructure companies, and model builders are all making different bets. The core video generation itself also presents opportunities for investors.
Runway’s Kwon, who also runs a VC fund, believes that specialization will be a key feature of AI video in an increasingly competitive market.
“Similar to LLM, there will be two or three big companies, and then there will be more companies like this. [legal tech startups] “At Legora and Harvey, we’re building applications on top of common underlying technologies. I think we’ll see more companies building for specific use cases, like marketing and social media, rather than for industry.” There’s no doubt we’ll see big gains there. ”
This article originally appeared on PitchBook News
