Daily Update: For Venture Capitalists, the Dark Cloud Has an AI Lining
Today is Monday, June 3, 2024, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global .?Subscribe?to be notified of each new?Daily?Update.?
Along Northern California’s Sand Hill Road, there is sadness and nostalgia for better times. Experienced venture capitalists share with young analysts tales of the glory days in 2021 and 2022, when interest rates were low and limited partners plowed investment into new funds without complaint. For many funds, the bleak venture capital winter continued in the first quarter of 2024. But a lucky few larger and more established funds were able to raise the capital to buy in at the beginning of the AI bandwagon. AI investing has proven a silver lining for venture capital firms this year.
The first quarter brought more bad news for venture capitalists and the tech startups that depend upon them to survive. Deal activity in the first three months dropped 17% year over year, falling to 4,242 deals from 5,125 deals. Deal value in the IT sector fell to $34.1 billion in the first quarter from $58.6 billion in the same period last year. Global fundraising also remained sluggish, declining 55% compared with 2023.?
Fewer deals and weaker fundraising have created a culture of megafunds and also-rans . The biggest, most established funds continue to receive allocations from limited partners, even if those allocations have reduced in size. Newer, smaller and unproven funds are struggling to reach their fundraising goals. This has led to what S&P Global Head of Product for Enterprise Solutions and Head of Private Markets Iyan Adewuya calls “the rise of the hyperscaler.”
According to Adewuya, hyperscalers are “top-tier players that are capable of raising a single fund the size of a midsize firm's entire business. The gap between the hyperscalers and the rest of the pack is only going to widen in the future.”
The emergence of hyperscalers can be seen in the AI investment sector . In the first quarter, the top 35 venture capital firms announced 51 AI funding rounds. In early 2024, AI investments comprised 1 of 5 funding rounds, from 1 of 10 rounds in early 2023. Investments in early-stage AI companies have been led by well-known and well-capitalized firms such as Andreessen Horowitz and Sequoia Capital Operations.
Despite the excitement over AI investments, there is little evidence of a gold rush mentality. Venture capital firms have become more selective in their AI investment strategies. According to S&P Global Market Intelligence, venture capitalists are turning their focus away from general-purpose foundational AI models. Increasingly, they are looking at companies that leverage third-party foundation models to solve specific problems within a certain sector. Everyone in venture capital has learned the brutal lesson imparted by this downturn: Have a clear path to profitability.
Today is Monday, June 3, 2024, and here is today’s essential intelligence.
Written by Nathan Hunt.
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—Listen and subscribe to the podcast from S&P Global Commodity Insights
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—Read the article from S&P Global Market Intelligence
Perpetual Inventory Clerk at Macy's
5 个月Great advice!