AI still dominating VC funding

The hype around AI is fueling venture capital gains, accounting for more than 60% of the increase in total venture-backed valuations, according to PitchBook. Pitchbook lead VC analyst Kyle Stanford joins Catalysts to discuss the trend ahead of the second quarter earnings season.

"If you look across the broad range of companies that are tagged as AI that are receiving funding, obviously there are some high, outstanding companies that are able to command the large valuations and are likely going to grow into it. On the flip side, when there's a huge amount of interest in the market, there's going to be companies that are able to slap AI on their business model, say that they're using it, or developing a new technology when they're actually not," Stanford explains. He notes that the Series A valuation for AI companies is nearly 30% higher than the rest of the market, which he believes is contributing to some of the "sloppiness" happening in the venture capital ecosystem.

However, Stanford stresses that venture capital firms are still very interested in AI, explaining, "right now, what everyone's looking for is efficiency. They're looking for automation. And AI is what is building that." As the second quarter earnings season quickly approaches, he urges investors to not be let down if companies don't see their AI investments materialize: "One quarter is not going to be the telltale sign of which companies are able to prove out their AI playbook... AI is going to be the long-term growth story of the market."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

Now the hype around A I is fueling some of the gains that we are seeing in the venture capital ecosystem, accounting for more than 60% of the increase in total venture backed valuations.

That's according to data from pitchbook.

Joining us.

Now on this, we've got Kyle Stanford.

He is Pitch books lead VC analyst, Kyle, thanks so much for being here.

So this data is fascinating.

You have uh for example, in here that there are 13 new A I unicorns over the past year, my question, are these unicorns real?

Are the businesses there or are they just slapping A I on the name and that's fueling valuations?

You know, I think there probably is some of that, right?

If you look across the broad range of companies that are, are tagged as A I that are receiving funding, obviously, there are some high outstanding companies that are able to command the large valuations and are likely going to grow into it.

On the flip side.

There's also when there's a huge amount of interest in the market, there's going to be companies that are able to slap A I on their business model, say that they're using it or developing a new technology.

When they're actually not, we are starting to see some uh likely sloppy deals down at uh seed and series A, the series A valuation for A I companies is almost 30% higher than for the rest of the market.

So there is probably some of that little um you're right, kind of slopping is happening in the, in BC.

But all as all in all when we look at A IA I is, is definitely where the interest is in, in BC.

And it's, it's building a lot of great companies.

Yeah, Kyle, I'm curious from the conversations you're having the numbers that we have seen and the trend that we have seen towards A I, this, this interest that that seems to be sweeping Wall Street.

Is this a story that you think is going to stay with the markets here for quite some time?

Yeah, it is right.

I I don't see any change in uh the interest in A I that VC has right now.

Um Obviously we've gone through cycles like this and crypto has been a cycle, you know, fintech has been a cycle and those have fallen off recently.

Uh But right now what everyone's looking for is efficiency.

They're looking for automation and A I is what is building that look at the public markets too, the companies that are, are uh you know, really driving the market performance, Microsoft Open A I or Microsoft, uh you know, Amazon, uh NVIDIA, those companies are all focusing on A I and trying to drive that story of how their future growth is going to be to come through that technology.

I think that's the key thing that so many of the folks who come on our show talk about is especially heading into this earning cycle, which companies are going to be able to prove out their A I investments.

What is the single biggest thing that you have seen in your role as a leading indicator that the companies that are A I plays are actually ones that are going to still be good.

A I plays 10 years from now.

Sure, I would definitely caution that one quarter is not going to be the telltale sign of which companies are able to um prove out their A I play.

But right, when you look at what, what Google has done and improve its growth story through A I. Um look at how Microsoft is, is trying to grab A I and make sure that it is, is part of every part of their uh product.

I think A I is going to be the long term growth story of the market.

I just want to ask you a random one, Kyle, we've, I just watched this viral Tik talk about how VC is the role to go into in finance if you want to make the most money and also have a moderately normal work life balance.

Uh Do you think that's still true given some of the changes that we've seen in the VC space over the past couple of years for folks who may be interested in that as a career path.

Yeah, I think that tiktok story was definitely what was happening in 2020 2021 right.

This was the the hot kind of sexy finance job to jump into, raise a fund, collect the fees, make some really, you know, nice looking investments and be able to say that your portfolio holds all these, you know, new unicorns.

I think what we're showing now is the way the market has fallen out of BC is that this is a very tough game.

There has to be a sourcing model, there has to be a proprietary deal flow.

There has to be a reason for LP S to come and invest in you and it is no longer easy to raise a fund even for brand name funds or firms that have long track records of performance are actually trying to find a way to get DPIL LP S are very cautious.

And so jumping into VC sounds great and it is still a great career path, but it's not gonna be nearly as easy as it probably was a couple of years ago when tiktoks like that were kind of coming up and, and made it seem like it was uh you know, the new hot thing.

All right, sage advice for all the tiktokers, including myself listening here, Kyle, thank you so much as always for joining us.

That was Kyle Stanford.

He is pitch books lead VC analyst.