Erin Griffiths
Over the past two years, many unprofitable tech startups have cut costs, sold off or gone out of business, but companies focused on artificial intelligence have continued to thrive.
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Currently, the AI boom, which began in late 2022, is the most powerful counterweight to the general slump in the startup industry.
Investors poured $27.1 billion into U.S. AI startups from April through June, accounting for nearly half of all U.S. startup funding during that period, according to startup-tracking PitchBook. U.S. startups raised a total of $56 billion, up 57% from a year ago and the highest three-month period in two years. AI companies are raising huge funding rounds reminiscent of 2021, when low interest rates made investors hesitant to take risks on tech bets.
In May, CoreWeave, a cloud-computing service provider for AI companies, raised $1.1 billion and then took on $7.5 billion in debt at a $19 billion valuation. Scale AI, a data provider for AI companies, raised $1 billion at a $13.8 billion valuation. And xAI, founded by Elon Musk, raised $6 billion at a $24 billion valuation. These funding rounds are driving up deal value and deal count across the industry, said Kyle Stanford, a research analyst at PitchBook.
“It’s not going down any more. The bottom has already fallen out,” he said.
In response, some venture capital investors have changed their messaging. Last year, IVP investor Tom Rabelo predicted a “mass extinction event” for startups and urged them to cut costs. Last week, he declared that era over, calling the current one a “great reawakening” and urging companies to “go all in” on growth, especially around artificial intelligence.
“The AI train has left the station and you need to get on it,” he wrote to X.
The startup slump began in early 2022 as many loss-making companies struggled to grow as fast as they had during the pandemic. Rising interest rates also drove investors to seek out less risky bets. To make up for the loss in funding, startups cut staff and scaled back their ambitions.
Then, in late 2022, San Francisco AI research institute OpenAI released the chatbot “ChatGPT,” sparking a new boom. Expectations for generative AI technology that can generate text, images, and videos have sparked a frenzy of startup companies being founded and funded.
“Sam Altman fixed the recession,” joked Shiki Chen, founder of startup Runway Financial, referring to OpenAI’s CEO. The financial software developer said his company is growing faster than it would have without AI because it can do the work of 1.5 people.
But even as AI brings efficiencies, it’s expensive to build: AI-focused startups need powerful computer chips and vast amounts of cloud storage.
An analysis of 125 AI startups by accounting and tax advisory firm Cruise Consulting found that they spent an average of 22% of their expenses on computing in the first three months of the year, more than double the 10% spent by non-AI software companies during the same period. “It’s no wonder venture capitalists are putting money into these companies,” says Healy Jones, vice president of financial strategy at Cruise. AI startups are growing faster than other startups, but “clearly they need money,” he says.
For investors backing fast-growing startups, there’s little downside to being wrong about the next big thing, but huge upside to being right. AI’s potential has generated a lot of hype, with prominent investors and executives predicting that the market for AI will be bigger than the markets for smartphones, personal computers, social media, and the Internet.
