Artificial Intelligence Attracts Big Share of Venture Pie

 

"AI has a huge appetite for data -- and venture dollars.

It has 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 never reached more than 6% even at its peak, 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 from 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."" [1]

1. EXCHANGE --- Markets & Finance: Artificial Intelligence Attracts Big Share of Venture Pie. Vartabedian, Marc.  Wall Street Journal, Eastern edition; New York, N.Y.. 12 Oct 2024: B.11.