Q2 VC Funding Rose As AI Took 28%, But Volume Down As MegaRounds Dominate

Venture money continues to flow into startups, especially those focused on AI, but the hidden secret is that deal volume and size are down as the funds are flowing predominantly to megarounds and megadeals with established names and networks. 

The upshot is that fewer real startups are being given access to the money as risk-aversion and demand for certainty characterize the venture environment now. JL

Paul Davenport reports in Boast:

AI startups enjoyed 28% of all global VC funding during the Q2 period, setting a record for the sector and helping push quarterly funding totals 8% higher than Q1 2024. (But) 47% of all VC funding in Q2 came from megarounds ($100m+), with total deal volume falling for the ninth consecutive quarter—a 7% drop from Q1 to just 6,230 deals last quarter. Deal value rose to an eight-quarter high, but only across a handful of megadeals. Far fewer businesses are enjoying the private equity windfall as investors prefer businesses tapped into existing, proven tech ecosystems. 

Anyone who had pegged artificial intelligence (AI) as a fad will be eating their words based on the latest Venture Capital (VC) investment trends from CB Insights.

According to the recently-published stats from Q2 2024, AI startups enjoyed 28 percent of all global VC funding during the period, setting a record for the sector and helping push quarterly funding totals 8 percent higher than Q1 2024. 

In total, AI startups captured $18.3 billion of the more than $65.7 billion in VC funding recorded in Q2.

There’s a big catch, however, as 47 percent of all VC funding in Q2 came from megarounds (ie. $100m+), with total deal volume falling for the ninth consecutive quarter—a 7 percent drop from Q1 to just 6,230 deals tracked by CB Insights last quarter. 

The TL:DR? The average deal size so far in 2024 is trending more than 17 percent higher versus 2023 at $14.4 million on average—but far fewer businesses are enjoying the private-equity cash windfall. 

For instance, Elon Musk’s xAI raised roughly $6 billion alone during Q2 2024, showing an appetite from investors for businesses that are tapped into existing, proven tech ecosystems (ie. Musk’s orbit of businesses that directly leverage the new tech xAI derives). 

There have also been signs of hesitancy in historically strong private equity markets, with Asia, the United States and Europe seeing deal volume sink from Q1 to Q2 2024—despite slight increases in total deals for Canada, Latin America, Africa and Oceania.

The PitchBook-NVCA Venture Monitor report mirrored similar sluggishness for VC funding during Q2, noting that total deal value had risen to an eight-quarter high, but only across a handful of megadeals (see: xAI, CoreWeave and other AI success stories). 

While researchers with PitchBook-NVCA indicate they’re optimistic about  how the rest of the year will pan out for startups hoping to capture a share of the VC capital market, there are many factors at play that could cause continued hesitancy on both a global and local level. 

While elections across the globe and near-daily geopolitical strife have made many investors hesitant to spend on earlier-stage or nascent businesses, the opportunities for leaders in the AI space to continue investor momentum don’t seem to be going away anytime soon.

Extending operational runway in any market

While private equity is an inevitability for many startups, venture capital is just one piece of a well-rounded capital strategy for growth-centric businesses. 

Even during periods of economic uncertainty (or straight-up downturns), businesses can look inward at their product and innovation teams to help unlock new opportunities for non-dilutive funding that can be essential to operations.

In both the United States and Canada, for instance, there federal government offers R&D tax credits that can help innovative businesses recoup a share of the investments they’re already making to drive innovation and develop new products. Along with potentially unlocking new product offerings, truly innovative R&D initiatives can be key to keeping teams effective (and potentially government investment) coming in when other sources of capital have dried up. 

Look to Darryl Hatton of ConnectionPoint for proof-in-action, as non-dilutive funding not only helped his team stay afloat during the peak of the pandemic, but derive even more powerful solutions that have unlocked huge success in today’s market increase, with AI funding driving an 8% rise in quarterly funding compared to Q1 2024.

2. How has overall VC deal volume changed in 2024?

Despite the increase in funding for AI, total VC deal volume has decreased for the ninth consecutive quarter. Q2 2024 saw a 7% drop from Q1, with only 6,230 deals tracked. However, the average deal size has increased by 17% compared to 2023, reaching $14.4 million.

3. What role are megarounds playing in the current VC landscape?

Megarounds (deals of $100 million or more) accounted for 47% of all VC funding in Q2 2024. This concentration of funds in large deals means fewer businesses are benefiting from VC investments. For example, Elon Musk’s xAI raised approximately $6 billion alone during Q2.

4. How are different global regions performing in terms of VC investment?

Asia, the United States, and Europe saw declining deal volumes from Q1 to Q2 2024. In contrast, Canada, Latin America, Africa, and Oceania experienced slight increases in total deals. This indicates varying levels of investor confidence across different markets.

5. What alternative funding strategies can startups consider in this environment?

Startups can explore non-dilutive funding options, such as R&D tax credits offered by governments in the US and Canada. These credits can help innovative businesses recoup a portion of their R&D investments, potentially extending their operational runway during periods of economic uncertainty. Partnering with experts who understand both the technological and tax aspects can help maximize these opportunities.