AI is taking over the venture capital market
Funding for AI startups accounted for roughly a third of all venture capital funding in both the second and third quarters. AI has an insatiable appetite for data—and for venture capital.
Almost two years have passed since the launch of OpenAI's ChatGPT caused a stir among venture capitalists looking to invest in AI. This gold rush has turned artificial intelligence into the largest share of venture capital funding, and based on third-quarter reports, it's just the beginning.
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In the third quarter, AI startups' share of global venture funding reached 31%, the second highest ever, according to CB Insights. The latest surge in interest is being driven by generative AI, which its proponents say has the potential to change everything from advertising to how companies operate.
Although the figure is slightly lower than the 35% of the second quarter, two consecutive quarters confirm a significant expansion compared to the situation just a couple of years ago. Thus, in the third quarter of 2022, AI accounted for only 13% of the total volume of venture deals.
By comparison, the fintech sector accounted for about a fifth of all funding in 2021, while crypto accounted for no more than 6% at its peak, according to Crunchbase data.
Investors' captivating interest in AI is making previously dominant sectors pale in comparison. Fintech took second place in terms of market share in the third quarter of this year, receiving only 13% of total funding.
“AI dominates—that says it all,” CB Insights senior analyst Benjamin Lawrence said in a telephone briefing. “AI companies are literally sucking up all the oxygen around them.”
While funding for AI startups fell nearly 30% in the third quarter to $16.8 billion, according to CB Insights, the decline is likely due to one major deal closing after the quarter ended. Earlier this month, OpenAI announced it had raised $6.6 billion in a round led by Thrive Capital with investments from Microsoft and Nvidia.
Of course, interest in AI has inflated company valuations, while venture capitalists are having difficulty exiting late-stage investments with inflated valuations.
Notable deals in the third quarter included Safe Superintelligence's $1 billion round from investors including Andreessen Horowitz, Sequoia Capital, DST Global, SV Angel and NFDG. Rounds of $100 million and above across all sectors accounted for 39% of total global funding value, down from 47% in the previous quarter.
The strong momentum in AI funding stands in stark contrast to the overall global venture market, which fell nearly 20% to $54.7 billion in the third quarter from the previous quarter and 21% year-over-year, according to CB Insights.
“We're seeing a divergence where much of the market is repeating the pattern of the dot-com crash,” said Peter Wagner, founding partner of Wing VC, referring to the tech sector crash in 2000. “But there is a segment related to generative AI that is now in an acceleration stage similar to the late 90s.”
Venture capital funds have the resources to continue this investment race. At the end of the first quarter, U.S. venture capital firms accumulated a record $328.4 billion in uncommitted funds, according to PitchBook Data.
“I don’t see any reason why this should slow down,” said Kyle Stanford, lead U.S. venture capital analyst at PitchBook, noting investor confidence in technology and capital reserves, especially among larger firms.
