The third quarter was the second-largest enterprise funding in history for artificial intelligence startups, raising as much as $19.1 billion. via Crunchbase.
However, the numbers also showed that total deal flow in the third quarter fell to below 1,000 rounds for the first time since ChatGPT launched – a decrease of 33% in comparison with last 12 months.
At the heart of the decline in deal flow was the earliest stage – seed – which saw a sharp decline of 43% from just a 12 months ago. However, it seems that valuations for these early seed rounds have never been higher.
the Book of Numbers
Last quarter, there have been just 627 seed rounds – defined here as angel, pre-seed and seed rounds for our purposes for AI firms – in comparison with a whopping 1,095 in last 12 months’s third quarter, Crunchbase data shows.
This figure represents a 43% decline in seed rounds in comparison with the third quarter of last 12 months and marks the first time that the variety of seed rounds for AI startups has fallen below 800 since launch OpenAIChatGPT.
Money is still sprouting
It can be logical to think that this decline in seed volume would have an impact on the total amount of investment going into AI startups at this stage of funding – but that will be unsuitable.
In fact, a small variety of AI-related seed rounds in the third quarter raised essentially the same amount of total money as the greater than 1,000 in the same quarter last 12 months, in accordance with a Crunchbase data review.
While seed rounds raised roughly 35% more dollars in the second quarter, seed dollar values in the third quarter were largely the same as the past few quarters.
The most blatant reason is that seed round valuations are at their highest – at least for now.
AI startups are indeed generating large seed rounds – resembling those based in San Francisco Feelingbased in Mclean, Virginia, valued at $85 million Defcon AIis $44 million — typically because young AI startups are already demanding a high valuation and due to this fact a larger dollar amount must be invested to get a legitimate share.
While it’s difficult to place an average price on seed round valuations – few startups announce valuations this early – the drastic decline in deal volume at this stage of funding, combined with the unchanged total dollar amount, leaves little doubt that average valuations have likely increased.
Small changes against the grain
The early- and late-stage/technology AI startup development rounds didn’t result in significant changes in Q2 results.
Early-stage funding saw a slight decline of 6% in comparison with the third quarter of last 12 months and a 12% decline in comparison with the second quarter. Venture capital dollars dropped significantly in the third quarter in comparison with the second quarter, but that is entirely attributable Elon Muskgenerative artificial intelligence start-up, xAIwhich officially announced its long-rumored $6 billion Series B round at a $24 billion valuation in the second quarter.
The $6.2 billion raised in Q3 in early rounds is actually an increase of 41% in comparison with Q3 2023.
Likewise, late-stage rounds have remained relatively unchanged in terms of deal volume. Late-stage enterprise dollars for AI startups reached $11.3 billion in the third quarter, up 36% from the second quarter and 30% from the same quarter last 12 months.
The late-stage dollar amount probably helped Alphabetinvests $5 billion in a developer of autonomous vehicle technology Waymo.