Tighter VC capital forces AI startups to face the music

Winter may have arrived early for AI and machine learning startups. After years of rosy projections, growth and investor enthusiasm, a new report from PitchBook shows that VC activity in the AI sector declined precipitously over the past few months.

Deal value growth in AI startups was down 27.8% quarter over quarter in Q2 2022, with overall investments reaching $20.2 billion across 1,340 deals. Year to date, VCs have funneled $48.2 billion into AI startups across over 3,000 deals — which sounds healthy but actually represents a 20.9% year-over-year dip.

“The IPO wave of 2021 came and went without significant outcomes for horizontal AI startups, leaving questions as to the market size for AI software and opportunities for AI chip companies.” PitchBook senior analyst Brendan Burke

AI funding declined across all deal stages, per PitchBook data. Excluding angel and seed rounds, early-stage investments hit $4.2 billion, a drop from $5.6 billion in Q1 and down 35% from the same quarter last year. Meanwhile, later-stage funding declined from $18.3 billion in Q1 to $13.4 billion in Q2 — a 48% decrease compared to last year.

As VC deal value and deal count in AI startups reach their lowest levels since Q4 2020, it’s not just investors that are pulling back.