US venture capital funding in Q2 hits $55bn amid AI frenzy

New York — US venture capital funding surged to $55.6bn in the second quarter, marking the highest quarterly total in two years, according to PitchBook data published on Wednesday.

The latest figure shows a 47% jump from the $37.8bn US start-ups raised in the first quarter, largely driven by significant investments in artificial intelligence (AI) companies, including $6bn raised by Elon Musk’s xAI and $1.1bn raised by CoreWeave.

The ongoing excitement around building AI technology since the launch of OpenAI’s ChatGPT chatbot has fuelled the recovery of venture capital (VC) funding as investors place substantial bets on start-ups. The hope is that revenue from AI adoption will yield significant returns.

“Investors assign a premium to everything AI — the capital intensity of most AI businesses requires outsize funding,” said Casber Wang, partner at Sapphire Ventures.

“As we discover stronger commercial use cases for AI, more AI companies are showing real revenue.”

After reaching a record high $97.5bn in the fourth quarter of 2021, US VC funding had been steadily declining. It hit a recent low of $35.4bn in the second quarter of 2023, amid a high interest-rate environment and a sluggish exit market. The recent influx of capital into AI start-ups has reversed the downward trend, as investors double down on AI foundation model companies as well as applications from code generation to productivity tools.

Despite the increase in deal activity, exits remain challenging, the data shows, as small deals generated about $23.6bn in exit value in the second quarter of this year, down from $37.8bn in the first quarter. The initial public offering market has struggled to gain momentum, even after companies, such as cloud data management firm Rubrik, went public.

Emerging VC fund managers may have already felt the pressure of a lack of proven returns, with only $37.4bn in commitments raised through the first half of the year. Large firms dominated the fundraising, with Andreessen Horowitz alone closing new funds with more than $7bn.

Some are expecting the mergers & acquisitions market for AI start-ups to pick up in the second half, as tech companies with capital or sought-after stock, from Nvidia to Databricks, have been acquisitive.

“They put venture dollars down first and watched how it evolved and started to shake out. Now I think they’re more serious about which pieces of the puzzle they want to own as they’re starting to see the emerging winners,” said Andrew Harrison, CEO at VC firm Section 32.

Reuters