Home Venture Capital AI is still a ray of hope in a dismal startup market

AI is still a ray of hope in a dismal startup market

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The past 12 months were a tough time for startups and venture funds, and the new year may not offer much in the way of relief.

A recent report from research platform Crunchbase pegged 2023 as the worst year for venture funding in the last half decade; it dropped to $285 billion, compared with $462 billion in 2022, a 38% decline. But one notable bright spot came from AI startups, which rode a hype wave around generative tech to a 9% boost in funding from the previous year.

Experts have attributed the slowdown in the startup market to uncertainty in the economy and a series of federal interest rate hikes in the US that have disincentivized riskier venture investments. Report author Gené Teare, senior data editor at Crunchbase, said investors are also wary after a funding boom from 2021 through the first half of 2022 that led to monster valuations.

“They’ve all just invested so much in recent years that they’re kind of holding back and waiting to see what’s going to happen,” Teare told Tech Brew. “And so the whole venture industry seems to be—not on pause, but holding back.”

Don’t expect that attitude to change all that much in 2024; Crunchbase’s report predicted that many of the layoffs from struggling mature startups in 2023 will snowball into closures this year as the market remains challenging. Teare said many of the companies that got big checks in the tech boom will be looking for more funding this year, and facing hard decisions if they can’t get it.

AI-generated cash: It wasn’t all doom and gloom in the startup world last year, though. Funding for AI startups grew to nearly $50 billion globally last year from $45.8 billion in 2022, largely on the backs of a handful of up-and-comers in the foundational model space. OpenAI, Anthropic, and Inflection AI collectively reeled in about $18 billion, or 36%, of that total sum, Crunchbase said.

Other areas that saw growth included insurance tech, semiconductors, and battery innovation, the report found. Manufacturing and cleantech also saw less pronounced declines than the rest of the market.

Those categories were the exception to overall trends, however, Teare said. “Broadly speaking, given how much funding went down, most sectors were down year over year,” she told us.

Planting seeds: One other notable trend, Teare said, was a focus on seed-stage funding. While that category was down last year from 2022, it saw less of a dip than funding at other stages in a startup’s life.

“If you talk about if there’s any sort of vibrance in the ecosystem, it seems to be more focused on seed,” Teare said. “So I think the whole industry has sort of shifted to the seed-stage companies, which is the focus right now.”

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