Eye On AI: AI’s Torrid Pace Of Funding Continues

This column is a look back at the week that was in AI. Read the previous one here.

Investors still can’t get enough of AI.

That’s the most obvious takeaway from a quick glance of funding numbers for the just-completed third quarter. In Q3, AI-related startups raised $18.9 billion, per Crunchbase. That is the second-largest quarter for AI funding — behind only Q2, which saw $23.4 billion invested — since the launch of ChatGPT in November 2022.

While the third-quarter number represents a 19% drop from the second quarter, it is also a nearly 30% increase from last year which saw “only” $14.6 billion invested in AI-related startups.

Big rounds abound

With nearly $19 billion raised, there were, of course, some big rounds — including:

Alphabet’s $5 billion investment into autonomous vehicle tech developer Waymo.
Artificial intelligence research lab Safe Superintelligence raised $1 billion from several big-name investors including Andreessen Horowitz and Sequoia Capital. The round valued the Palo Alto, California-based company at $5 billion, per Reuters, which first reported the round.
AI semiconductor and software startup Groq locked up a $640 million Series D led by funds and accounts managed by BlackRock at a valuation of $2.8 billion.
Toronto-based Cohere raised a $500 million Series D at a $5.5 billion valuation. The new round reportedly will be led by Canadian pension investment manager PSP Investments.

Despite those big rounds, last quarter lagged behind Q2 likely because the latter had more extremely large $500 million-or-more rounds. In fact, Q2 witnessed twice as many — eight — and three times as many $1 billion-plus rounds.

That obviously included Elon Musk’s generative AI startup, xAI, which officially announced its long-rumored $6 billion round at a $24 billion valuation that included investment from Valor Equity Partners, Vy Capital, Andreessen Horowitz, Sequoia Capital, Fidelity Management & Research Co., Prince Alwaleed Bin Talal and Kingdom Holding Co., among others.

Deal flow and looking ahead

Another interesting thing to note about the third-quarter numbers — aside from the massive dollar figure — is that deal flow actually is down. In fact, deal flow has declined the past two quarters and in Q3 dipped under 1,000 rounds for the first time since ChatGPT launched.

Deal flow fell from 1,211 rounds announced in Q2 to only 947 in Q3 — a 22% decline. That drop is even more massive when looking at last year’s Q3, which saw 1,444 investment deals — 34% more than last quarter.

With the dollar total going up and deal flow numbers dropping, that likely means more big deals for more proven AI startups (or at least those that can convince investors of their AI chops) and fewer early seed and Series A deals for young startups.

Such a scenario is likely when one considers investors only have so much money to place bets on AI startups, and with big valuations associated with those big rounds, that money can dry up quickly.

Don’t expect the dollar amount to drop much in Q4. On Wednesday, OpenAI officially announced its long-awaited $6.6 billion raise, led by Thrive Capital, at a post-money valuation of $157 billion. There are also reports OpenAI rival Anthropic is looking for more cash very soon.

With so many generative AI startups (the ones raising the really big rounds) burning through so much cash so quickly, we may continue to see big venture dollar totals for the next several quarters even as the number of fundings continues to cascade downward.