Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today we’re taking our final look back at Q1 venture capital through the lens of AI-focused startups. New data out this week paints a mixed picture of the AI startup landscape. Venture dollar volume in Q1 was pretty good, though there was weakness in certain startup stages. Exit data was weak, however, and some Q1 numbers were juiced by a single deal.
AI-focused startups have grown past their history as the hot new thing (remember when every new tech company was doing AI for 45 minutes?) into a more mature niche; TechCrunch has spent a reasonable amount of time digging into their economics, and just this week a new, $180 million AI-focused fund caught our attention.
In the post-hype days, then, let’s check in on what global AI startups got done with investors in Q1. We’re leaning on this report from CB Insights, which breaks down the quarter’s numbers for us. Let’s pick them apart and see what we can divine concerning the future.
AI Q1 2020
To set the stage, venture capital investment into AI-focused startups has generally risen on a global basis for years. Indeed, deal and dollar totals have risen year-over-year from 2015 through 2019. Indeed, 2019’s Q2 and Q3 saw record AI startup venture dollar volume ($8.45 and $8.47 billion, respectively), per CB Insights.
Q1 2020 effectively matched those record venture dollar results with $8.42 billion in capital raised, though with a key caveat. Namely that Waymo’s huge Q1 round, a multi-billion deal, helped improve the results. Without the Waymo round, Q1’s venture totals were closer to $6 billion, a strong result but nothing like record levels that 2019 delivered.
Falling venture dollar volume for a startup niche isn’t the end of the world, and as Q1 2020 saw roughly Q4 2019’s dollar volume, should AI startups be at all concerned? Perhaps, but for a different reason. Q1 2020 AI startup deal volume was the lowest since Q4 2018, meaning that an unimpressive (once adjusted for Waymo) venture dollar result was paired with a notable decline in deal volume in the first quarter of the year.
That’s not bullish, per se, even if around $6 billion in investment in around 500 global deals for AI startups is also not precisely bearish itself. It’s not likely we’re seeing much COVID-19 impact in these numbers—the global lockdown snowballed towards the end of the quarter and venture deals take a moment to close and are often announced far later. Q2 2020 could tell us much more about the impact of COVID-19 in AI startup investment. Q1’s early indicators, however, aren’t exactly encouraging.
Two more things before we go. First, the United States saw its share of AI startup deal volume rise to 41% in Q1 2020, up from 37% in Q4 2019 and 39% in Q1 2019. The country used to see a higher percent of global AI deals (51% in Q1 2017, per the CB Insights report), meaning that America’s small gains are still far under historical highs. That said, the country with the next highest share was China, which managed just 10.5% in Q1 so it’s hard to be too irked at the domestic result.
And second, AI startup exits were weak in Q1. This should not surprise. The exit window lasted about two venture-backed IPOs in the United States before shutting. In what CB Insights calls an “11-quarter low,” there were just 29 global AI exits in Q1 and zero IPOs, the worst result since Q2 2017, though that quarter did include an IPO.
As we noted at the top, it was a mixed quarter. One cannot dismiss 500 global deals and north of $8 billion in investment (including the Waymo check), even if once we peer into the numbers there are weaknesses to be found, like falling Seed volume in recent quarters amongst AI startup and lackluster exits. Like with many bits of Q1 data, all this feels a bit transitory. What we really want to know is what is happening now that the COVID-19 economy is truly here.