Early AI Funding May Be Showing Some Cracks

While funding to AI-related startups remains strong, with nearly $30 billion raised so far this year alone, there are indicators that some of the earliest-stage investors are getting some AI fatigue.

Deal-making volume seems to be slowing in the second quarter — with just a couple of weeks left — compared to other recent quarters, when investors’ appetite showed little to no limits for the all-encompassing technology.

According to Crunchbase data, the number of funding deals is on pace to reach only about 900 this quarter — a seemingly significant drop from the 1,052 last quarter and a decline of nearly 30% from the same quarter last year.

Not surprisingly, it is the earliest funding rounds — angel, seed and early stage — at the root of the deal-making slowdown.

The good news for AI startups is that the dollar amount is up. The second quarter already is pacing to be one of the highest-dollar quarters since early 2022 with more than $16 billion already raised.

That is due in part to some huge rounds. Five raises hit $1 billion or more this quarter — including those by xAI (the biggest one), CoreWeave, Xaira Therapeutics and Scale AI.

Seed funding slows

However, deal volume is seemingly dropping — and that starts in the earliest rounds. Although it is difficult for seed rounds to make a dramatic shift in total dollars of any sector, it is the most likely to show changes in deal flow since it is the largest category by volume of deals.

Only 423 seed/angel rounds were announced through the first week of June, putting it on pace for likely just more than 600 funding rounds. That will be a steep decline from the 779 deals announced last quarter and likely a drop of about a third from Q2 last year.

The dollar amount also is on pace to be down, but again — with seed and angel rounds being small by their very nature — it isn’t a pronounced drop to the overall total of funding AI startups receive.

Total dollar amount for the quarter seems likely to hit between $1.3 billion and $1.4 billion, just a tick below the $1.6 billion in Q1 and the $1.5 billion in Q2 2023.

Early-stage deals stagnate

The number of early-stage deals also slowed. While the quarter is on pace for a similar amount of deals compared to Q1, that is still more than a 15% decline from Q2 last year.

The somewhat good news for early-stage funding is that the dollar amount is up. Already $9.8 billion has been raised in early-stage deals, compared to the $6.4 billion last quarter or the $4.7 billion raised in Q2 last year.

However, even that comes with a large caveat; that difference is mainly due to one round. xAI’s $6 billion round — with investment from the likes of Valor Equity Partners, Andreessen Horowitz and Sequoia Capital — greatly skews the early-stage funding numbers, making up nearly 60% of the total.

What it means

To be honest, it likely is too early to tell if the deal volume slowdown means anything quite yet.

It could mean some investors are becoming less willing to back the youngest AI startups and instead are willing to invest in bigger rounds for somewhat  more proven companies even if the valuations are significantly higher.

In addition, since seed and growth-stage investor mindsets are often different, perhaps AI fatigue is setting in among early investors who are tiring of the story and escalating prices.

One thing to keep in mind is that as early-stage volume ticks down, that could mean fewer companies looking for large growth rounds in the next 18 to 24 months, since some may never have received the early funding when they were young to get to later-stage funding.

Nevertheless, the dollar amount is up and investors still seem eager to pour in billions to nearly anything AI related — just perhaps not in the same number of deals as before.

Methodology

The data contained in this report comes directly from Crunchbase, and is based on reported data. Data reported is as of June 6, 2024. Companies included in the data fall within Crunchbase’s artificial intelligence industry group tag. Some of the decline in deal counts may be attributable to the tendency for smaller, seed-stage rounds to be added to the Crunchbase dataset several weeks or months after they close.

Glossary of funding terms

Seed and angel consists of seed, pre-seed and angel rounds. Crunchbase also includes venture rounds of unknown series, equity crowdfunding and convertible notes at $3 million (USD or as-converted USD equivalent) or less.

Early stage consists of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, corporate venture and other rounds above $3 million, and those less than or equal to $15 million.

Late stage consists of Series C, Series D, Series E and later-lettered venture rounds following the “Series [Letter]” naming convention. Also included are venture rounds of unknown series, corporate venture and other rounds above $15 million.

Technology growth is a private-equity round raised by a company that has previously raised a “venture” round. (So basically, any round from the previously defined stages.)

Illustration: Dom Guzman