News & Analysis

driven by the PitchBook Platform
Venture Capital

VCs searching for the AI startup that will end the world

Artificial intelligence has become one of the hottest sectors for VC investment in recent years. Here we breakdown historical investment trends, as well as what contributed to the uptick in activity.

Every year the tech industry sees new industries rise while others fall by the wayside (remember cleantech?). What’s hot in tech, it seems, changes with the seasons. Not long ago, there was the era of ecommerce-driven social platforms—a la Pinterest and Wanelo—then came fintech and blockchain, and now it looks like we’ve hit the summer of artificial intelligence.

Although AI has been thrust into the spotlight somewhat recently, with tech giants devoting entire teams to its research, the idea and iterations of the technology have been being worked on for almost half a century now. So why the sudden uptick in interest by corporations, investors and startups?

In recent years, there’s been a handful of technological advancements that have given rise to the budding industry we’re seeing today, most notably the proliferation of large datasets created by software-based companies and an increase in computing power needed to analyze this data at scale. A great primer on the history and types of AI is given here by Frank Chen of Andreessen Horowitz.

This perfect storm of technology has had investors foaming at the mouth, and 2014 marked a banner year for VC investment in US-based AI startups, with capital invested and deal count increasing YoY by 183% and 41%, respectively. Deal count continued its rise into 2015, while capital invested took a bit of a dip, although this trend is consistent across VC investment in many industries. And even with a lot of talk of a cooling in venture capital this year, investment in AI has stayed rather resilient—even increasing. In 1H, AI startups garnered $704 million of venture capital through the completion of 79 deals, which puts 2016 on pace to break records for both capital raised and deals completed.

Click to enlarge
Click to enlarge

Looking at a breakdown of round types helps paint a picture of AI’s maturity. Of the 79 deals done in 2016 so far, 48% were seed rounds. When compared to a more established industry such as SaaS, which saw seed deals account for 26% of rounds, it’s apparent that AI as a sector has really just started to pick up steam.

Click to enlarge
Click to enlarge

Marc Andreessen famously stated in 2011 that “software is eating the world.” That commonly repeated trope could probably be edited nowadays to “smarter software is eating the world.” While there has been quite a bit of VC investment in AI startups the past couple of years, don’t be surprised to see the upward trend continue moving forward.

As software penetrates and disrupts more and more industries, so comes opportunity for AI to be applied, learning and optimizing as it goes.

PitchBook Platform users can access our full dataset on VC investment in the U.S. AI industry.

  • mikey-headshot-17-pdj-591x548.jpg
    Written by Mikey Tom

    Mikey was a senior financial writer at PitchBook covering technology startups and the venture capital industry. Prior to joining PitchBook, Mikey worked on the marketing team at Porch, a Seattle-based tech company that connects homeowners with home services professionals.

    Born and raised in the Seattle area, Mikey holds a degree in philosophy and a minor in entrepreneurship from the University of Washington. Outside of work you’ll find him either on the golf course or at a concert around town.

Join the more than 1.5 million industry professionals who get our daily newsletter!