Corporate investors are pouring huge sums into generative AI startups, rankling traditional VCs who are getting squeezed out of deals as they contend with soaring valuations and onerous deal terms.
Corporations only participated in about a quarter of generative AI deals last year, but they drove the bulk of the $29 billion that was invested globally, according to PitchBook data. It’s impossible to say exactly how much—VC deals commingle funds from multiple investors, so any single backer’s contribution is generally unknown—but the data shows that CVCs were tied to 80% of VC deal value flowing into generative AI companies.
Notable corporate deals include Amazon investing up to $4 billion into Anthropic in September, Nvidia joining Cohere‘s $270 million Series C in June, and Microsoft agreeing to invest $10 billion into OpenAI last January. Investors including Microsoft and Nvidia also led Inflection AI‘s $1.3 billion round in June.
Mixed company
VCs are voicing frustration over the effect corporate investors are having on the ecosystem, pointing to rising valuations and deal terms that make future investments difficult.
“They can have an outsized influence on companies,” said Kirby Winfield, founding general partner at Seattle-based pre-seed investor Ascend. “We tell our companies to stay the hell away from corporates because there’s a litany of reasons not to take corporate venture capital.”
Among the reasons, Winfield said, are onerous deal terms that make future exits difficult if the company wants to sell to a competitor. At the early stage, Winfield points out, corporate investors can be distracting and sometimes high maintenance. Fundamentally, though, Winfield said that corporate investors’ goals and aims directly clash with those of VCs.
Rising valuations spurred by corporate competition are also a concern. Michael Dempsey, managing partner at Compound, says traditional VCs can help rein in sky-high valuations.
“You want someone who is pricing a company based off of rational financial expectations because we’ve seen what happens when that isn’t the case,” Dempsey said. “Lots of dollars are chasing a few great companies—that creates higher prices.”
Michael Stewart, a partner at M12—Microsoft’s corporate venture capital arm—agreed that some of the deal terms corporate backers offer can’t always compete with those of traditional VCs.
“If I am offering a term sheet with expectations of other things besides just money, some entrepreneurs would just say, ‘I’d like the easier path,’” Stewart said.
Stewart also worries about valuations getting pushed up and the effect that’s having on the broader ecosystem. “One thing about the climate that is a concern is companies getting drunk on this kind of capital,” he added.
However, the corporate money flowing into generative AI, Stewart argues, is a validation of all the work companies are doing. “It’s a sign of confidence in startups,” he said.
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