AI startups account for 22% of first-time VC financing, reflecting a mass pivot among founders that is ringing alarm bells for investors concerned that the technology is increasingly being used as a marketing tool to raise capital.
Among startups that raised money for the first time this year, $7 billion went to AI & ML companies, according to PitchBook data through Q3. It’s another historic high for a vertical that has been outpacing its peers in metrics like valuation and unicorn creation.
But investors say the pivot by founders is making it harder to find lucrative opportunities within the vertical.
“The real challenge is cutting through the ‘AI washing’ to identify founders who aren’t just using AI as a buzzword,” said Richard Dulude, co-founder and general partner at pre-seed and seed investor Underscore VC. He said that finding companies working genuinely to solve novel problems that large foundation model providers can’t address has become his chief objective.
There is a massive opportunity if you can cut through the noise in a market where every company claims to be an AI company, he said.
But in this tight fundraising environment, some startups simply can’t afford not to integrate AI into their offering. PitchBook senior emerging tech analyst Brendan Burke said that with development costs going down, it’s become a necessity for companies to add generative AI.
“Right now, there are too many startups seeking too few dollars and AI costs are plummeting, making it trivial for first-time founders to integrate LLMs into their products,” he said. “Many non-AI companies can’t raise a dollar today.”
Other investors aren’t showing restraint, instead leaning into and encouraging founders to pivot and flood the space. James Currier, general Partner at NfX, said that the vertical should continue to grow unfettered.
“We don’t need efficiency in the process,” he said. “There’s not a fixed pie that gets divided where we need to be judicious. There is an infinite pie based on human talent and enthusiasm.”
Related read: Q3 2024 AI & ML report
Featured image by Jenna O’Malley/PitchBook News
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