According to PitchBook data, US venture capital funding had its highest quarterly total in two years at $55.6 billion in the second quarter, rising 47 per cent from $37.8 billion raised in the first quarter with large investments across the board into artificial intelligence companies, including Elon Musk’s xAI raising $6 billion and CoreWeave $1.1 billion.
The excitement around AI technology, especially post the release of OpenAI’s ChatGPT chatbot, has been a fierce catalyst. Expectations of the huge return stream that AI will install have reignited the VC filing pattern.
“Investors assign a premium to everything AI – the capital intensity of most AI businesses requires outsized funding,” said Casber Wang, partner at Sapphire Ventures.
“As we discover stronger commercial use cases for AI, more AI companies are showing real revenue.”
US VC funding had been trending down after its record run of $97.5 billion in the fourth quarter of 2021. It notched a low point of $35.4 billion in the second quarter of 2023 as high interest rates and stagnant exit market held back investor appetite. However, the recent rush of capital toward AI startups has reversed this, focusing investor attention on companies at both ends of the AI foundation model spectrum—those generating code and those building productivity tools.
While deal activity inches higher, exits are still proving difficult to come by. Small deals produced just $23.6 billion in exit value in the second quarter, compared with $37.8 billion in the first. The initial public offering market has failed to take off yet, even with listings like cloud data management company Rubrik.
Emerging VC fund managers are under pressure: Only $37.4 billion of new commitments have been raised in the first half of the year based on zero proof of returns. Big firms have been dominating the fundraising; Andreessen Horowitz itself closed well over $7 billion in new funds.
Looking ahead, some predict that the M&A market for AI startups will pick up in the second half of this year. Indeed, it will be big tech companies with capital—or highly valued stock, in the case of Nvidia and Databricks—that seemingly have an appetite for acquisition that will further spur investment in AI startups.
“They put venture dollars down first and watched how it evolved and started to shake out. Now I think they’re more serious about which pieces of the puzzle they want to own as they’re starting to see the emerging winners,” said Andrew Harrison, CEO at VC firm Section 32.