One out of every three VC dollars invested globally in 2024 went to an AI startup, reflecting a continued coalescence around the vertical that some investors fear is having a distorting effect on the market.
Funding for AI and ML startups accounted for 35.7% of all VC global deal value last year, according to PitchBook data. In North America, the vertical grabbed nearly half of all VC dollars. Globally, investment in AI and ML startups increased more than 50% to $131.5 billion.
Some venture capitalists say, however, that the funding rush—driven largely by big tech companies—indicates a lack of focus throughout the VC landscape when it comes to AI.
“It’s not a question of too much capital, but rather the inefficient allocation of that capital,” said Samir Kumar, co-founder and general partner at Touring Capital. Kumar said that investors have piled into the vertical and gotten caught up in the hype, leading some to overpay. He anticipates that to change in 2025.
“Frankly it has felt like a return of the ZIRP era in that early-stage AI valuations are disconnected from reality,” he said. “We should expect this to start correcting in a major way.”
Some investors say that the historic amount of capital isn’t making it into the right kind of companies.
“Too much money is being focused on the foundational model and infrastructure layers,” Shashank Saxena, managing partner at Sierra Ventures, said. Large language model providers like OpenAI, xAI and Anthropic have raised record sums, with funding for these companies up more than 100% in 2024.
According to Saxena, the current investment climate isn’t sustainable. He said investors need to look for AI opportunities elsewhere: “I don’t think enough has gone into the application layer, which will produce long-term returns.”
But at a time when nearly 1 in 4 new startups is an AI company, finding the best opportunities has gotten harder, investors say. Casber Wang, partner at Sapphire Ventures, said that while sorting through startups is more difficult, the payoff has equally increased. “The signal-to-noise ratio has gotten worse, but there’s also more absolute signals in the system,” he said.
“I don’t care how hard it is to find these companies,” Wang added. “You just have to go and do the hard work.”
Featured image by Drew Sanders/PitchBook News
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