AI Gets 31% of Venture Funds In 2nd, 3rd Quarters This Year, Dwarfs All Else

To the extent venture investing has a pulse this year, it is driven by AI. 

And with more than $300 billion in investable capital not yet deployed - and few, if any future facing alternatives with significant upside - there may be more to this rally despite rising concerns about operational practicality and profitability. JL 

Marc Vartabedian reports in the Wall Street Journal:

AI deals have the heftiest slice of the venture funding pie with no signs of letting up. In the third quarter, funding for AI startups made up 31% of global venture funding, its second-highest share ever. While the figure is shy of the 35% share that AI deals accounted for in the second quarter, the back-to-back quarters amount to a dramatic widening from two years ago. To put this into historical context: Fintech accounted for a fifth of all funding in 2021, while crypto at its peak never reached more than 6%. “AI companies are sucking the oxygen out of the room for everyone else.” To keep the AI funding bonanza going, as of the end of the first quarter, U.S. venture firms were sitting on a record $328.4 billion of capital raised but not yet invested

AI has a huge appetite for data—and venture dollars.

It’s been almost two years since the mainstream launch of OpenAI’s ChatGPT set off a frenzy among venture capitalists for AI deals. The gold rush has turned artificial intelligence into the heftiest slice of the venture funding pie with no signs of letting up, according to the latest batch of third-quarter reports.  

 

In the third quarter, funding for AI startups made up 31% of global venture funding, its second-highest share ever, according to data firm CB Insights. The latest rush is fueled by generative AI, which proponents say will reshape everything from advertising to how companies operate.

While the figure is shy of the 35% share that AI deals accounted for in the second quarter, the back-to-back quarters amount to a dramatic widening from only a couple of years ago. In the third quarter of 2022, for instance, AI made up just 13% of all venture deal value, according to CB Insights. 

To put this into historical context: Fintech accounted for about a fifth of all funding in 2021, while crypto even at its peak never reached more than 6%, according to data firm Crunchbase.

Investors’ ravenous fixation on AI deals makes once-dominant sectors pale in comparison. Financial technology had the second-highest market share in this year’s third quarter with 13% of funding value. 

“AI is dominating—enough said,” CB Insights senior lead analyst Benjamin Lawrence commented during a briefing call. “AI companies are almost sucking the oxygen out of the room for everyone else.”

 

Granted, funding for AI startups sank nearly 30% to $16.8 billion in the third quarter from the previous one, per CB Insights. But the drop was likely the result of at least one large deal closing just after the quarter ended. Early this month, OpenAI said it raised a $6.6 billion funding round led by Thrive Capital with investment from tech giant Microsoft and chip maker Nvidia, among others.

To be sure, the focus on AI has pushed up valuations of those companies at a time when venture investors are struggling to exit investments in late-stage startups with lofty valuations.

 

Among the noteworthy AI deals of the third quarter was a $1 billion round raised by Safe Superintelligence from investors including Andreessen Horowitz, Sequoia Capital, DST Global, SV Angel and NFDG. Rounds of $100 million and up across all sectors accounted for 39% of overall global funding value, down from 47% in the prior quarter, according to CB Insights.

The propulsion behind AI funding is a far cry from the global venture market overall, which saw funding in the third quarter fall nearly 20% to $54.7 billion from the prior quarter and 21% from the year-ago quarter, according to CB Insights. 

“You have this market divergence thing where a lot of the market is following the pattern of the dot-com bust,” said Wing VC Founding Partner Peter Wagner, referring to the tech sector crash that occurred around 2000. “But then you have this subset of the market which is very closely linked to generative AI, which is kind of in a late ‘90s-type of acceleration.” 

Venture firms have the resources to keep the AI funding bonanza going. As of the end of the first quarter, U.S. venture firms collectively were sitting on a record $328.4 billion of dry powder—capital raised but not yet invested, according to analytics firm PitchBook Data.   

“I don’t see any reason that we should think it’s slowing down,” said Kyle Stanford, the lead U.S. venture capital research analyst at PitchBook, crediting investors’ bullishness on the tech and the stockpile of money that particularly larger firms have to deploy.