While funding for AI startups stays strong (nearly $30 billion raised this yr alone), there are signs that some early-stage investors are experiencing AI fatigue.
Deal volume appears to be slowing in the second quarter – with just a few weeks to go – in comparison with other recent quarters when there was little or no reduction in investor appetite for versatile technology.
According to Crunchbase data, the variety of financing deals is only expected to achieve around 900 this quarter, which is a seemingly significant decline from 1,052 last quarter and a decline of just about 30% in comparison with the same quarter last yr.
Not surprisingly, the reason for the slowdown in dealmaking is the earliest rounds of funding – angel, seed and early stage.
The excellent news for AI startups is that the dollar amount has increased. The second quarter is already prone to be one of the highest revenue quarters since the starting of 2022, with over $16 billion already collected.
This is partly resulting from some huge rounds. This quarter, five raises reached $1 billion or more – including those led by xAI (the biggest), weave core, Xair therapy AND AI scales.
Seed funding is slowing down
However, deal volume is clearly declining – and that starts with the earliest rounds. While seed rounds have difficulty making a dramatic change in the total deal amount in any sector, they are most definitely to indicate changes in deal flow because they are the largest deal category by volume.
In the first week of June, only 423 seed/angel rounds were announced, setting the pace for perhaps just over 600 rounds of funding. This will be a sharp decline from the 779 deals announced last quarter and likely a decline of about a third in comparison with the second quarter of last yr.
The dollar amount also needs to be declining, but again – because seed and angel rounds are inherently small – it isn’t a marked drop in the overall amount of funding received by AI startups.
The total dollar amount for this quarter appears to be between $1.3 billion and $1.4 billion, just barely below the $1.6 billion in Q1 and $1.5 billion in Q2 2023.
Early stage deals stagnate
The variety of early-stage deals also decreased. While this quarter saw a similar variety of transactions in comparison with the first quarter, this is still a decline of over 15% in comparison with the second quarter of last yr.
The somewhat excellent news in early stage funding is that the dollar amount has increased. Early-stage deals have already raised $9.8 billion, up from $6.4 billion last quarter and $4.7 billion raised in the second quarter of last yr.
However, even this comes with a big caveat; this difference is mainly resulting from one round. xAI’s $6 billion round – with investments from firms corresponding to Valor Capital Partners, Andreessen Horowitz AND Capital of Sequoia — significantly skews the volume of early-stage funding, accounting for almost 60% of the total.
What does it mean
Honestly, it’s probably too early to inform if the slowdown in transaction volume means the rest.
This could mean that some investors are becoming less willing to back the youngest AI startups and are as an alternative willing to speculate in larger rounds in barely more proven firms, even if valuations are much higher.
Additionally, since seed and growth stage investor attitudes are often different, perhaps AI fatigue is beginning to set in among early investors who are uninterested in the history and rising prices.
Please note that as early stage volumes decline, this may mean fewer firms looking for large growth rounds in the next 18-24 months as some may have never received early funding when they were young to realize later stage funding.
Nevertheless, the dollar amount has increased, and investors still seem willing to pour billions into almost anything related to AI – although perhaps not in the same variety of deals as before.
Methodology
The data in this report comes directly from Crunchbase and is based on reported data. The data shown is as of June 6, 2024. The firms included in the data belong to the Crunchbase artificial intelligence industry group tag. Some of the decline in deal volume can be attributed to the trend of smaller seed rounds being added to the Crunchbase dataset weeks or months after they close.
Glossary of financing terms
Seeds and Angels consist of seed, pre-seed and angel rounds. Crunchbase also covers enterprise rounds of unknown series, equity crowdfunding, and convertible notes valued at $3 million (USD or converted USD equivalent) or less.
The early stage consists of Series A and Series B rounds, in addition to other kinds of rounds. Crunchbase includes enterprise rounds of unknown series, corporate ventures and other rounds above $3 million and those valued at lower than or equal to $15 million.
The Late Stage consists of Series C, Series D, Series E, and later lettered expedition rounds following the “Series [Letter]” Naming convention. Also included are enterprise rounds of unknown series, corporate ventures, and other rounds valued over $15 million.
A technology development is a private equity round led by a company that has previously raised a “venture” round. (Basically any round from the pre-defined stages.)