US startup funding continues to drop despite AI frenzy

By Krystal Hu

(Reuters) – U.S. investors injected $170.6 billion into startups in 2023, a decrease of nearly 30% from the $242.2 billion recorded in 2022, as the venture capital funding market continues to grapple with valuation resets amid rising interest rates, according to PitchBook data released on Thursday.

The latest data, from a year in which megadeals in artificial intelligence captured the imagination of investors, shows a persistent decline from the peak of U.S. venture funding in 2021 when startups raised $348 billion.

AI startups attracted one out of every three dollars invested in the U.S. last year, reflecting a surge in investor interest after OpenAI’s ChatGPT grabbed the spotlight and startups raced to develop AI technology.

AI labs that train large language models, an expensive endeavor given the amount of computational power required, made noteworthy contributions to an otherwise cautious investment year. The outsized investments in AI frontrunners OpenAI and Anthropic accounted for 10% of the total deal value in 2023, PitchBook data showed.

There was a modest uptick in deal activity in the fourth quarter, with 3,934 deals completed, sparking hopes for a potential stabilization in the market.

Instances in which startups raised funding at a lower valuation than in their previous rounds jumped from 8% in 2022 to 20% in 2023 – suggesting a broad reset of valuations among late-stage companies.

“AI names are trading at a premium. Some software names are trading at a premium. Meanwhile, food and grocery delivery and crappy consumer concepts are all trading down 95% from their last round,” said Ken Smythe, founder of Next Round Capital which invests in the private market.

Many of 723 so-called unicorn companies, which are valued at over $1 billion in their latest round of funding, are expected to try to raise capital again this year as they use up cash.