Drilling Down into Venture Capital Financing in Artificial Intelligence

It should come as no surprise that venture capital (VC) investors are drilling down into startups building businesses with Artificial Intelligence (AI) at the core. New data from PitchBook actually shows that AI startups make up 22% of first-time VC financing. They note that $7 billion of first-time funding raised by startups in 2024 went to AI & machine learning (ML) startups (this is according to their data through Q3 of 2024).

Crunchbase data also showed that in Q3 of 2024, AI-related startups raised $19 billion in funding, accounting for 28% of all venture dollars for that quarter. They importantly point out that this excludes the $6.6 billion round raised by OpenAI, which was announced after Q3 closed. With this unprecedented level of investment in the AI vertical, there is increasing concern that i) some startups might be using AI as more of a buzzword to raise capital rather than truly focusing on this area, and/or ii) there are bubbles in certain sub-verticals.

PitchBook analysts also note that with limited funding available for startups, integrating AI into their offerings is crucial for founders to secure investment. However, this also makes it harder to distinguish which startups are genuinely engaging in meaningful AI work. For investors, the challenge lies in sifting through the AI “noise” to identify those startups that are truly transformative and focusing on key areas within the sector, which will be vital as we move into 2025.

A recent article in Forbes examined the themes that early-stage investors were targeting for the new year. When looking at investment in AI startups, these included the use of AI to help pharmaceutical companies optimize clinical trials, AI in fintech and personal finance, AI applications in healthcare to improve the patient to caregiver experience, and AI-driven vertical software that will disrupt incumbents.

According to the Financial Times (FT), this boom in AI investment comes at a time when the industry still has an “immense overhang of investments from venture’s Zirp era” (Zirp referring to the zero interest rate policy environment that existed between 2009 and 2022). This has led to approximately $2.5 trillion trapped in private unicorns, and we have not really seen what exit events or IPOs will materialize and what exit valuations will return to investors. Will investors get their capital back and see the returns they hope for? Only time will tell, but investors do not seem ready to slow down their investment in AI startups any time soon. As the FT says, this could be a pivotal year for the fate of VC investment in AI. We will all be watching closely.

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