VCs are Ditching AI Start-ups in 2022! Funding is Down 44% in Q2

VCs target AI accounting start-ups as companies look to control spending in an uncertain economy!

Venture capital investments are starting to trend toward AI start-ups providing applications with near-term commercial use cases, such as data preparation, robotic process automation, computer vision, database management, and natural language processing. Anyone who is following the news will be aware that Q2 2022 venture capital funding data took a steep drop.

Artificial intelligence start-up investors are shifting their focus to accounting software, a traditionally subdued corner of business technology, as companies are getting prepared for a potential economic slowdown. Venture investment may be trending down, but funding for AI is carrying out even worse. Total venture capital deal count worldwide has continued momentum from the previous year's record highs, but up to this point in 2022, "deal value has diminished rather significantly across every single one of the stages," according to a PitchBook report—and AI funding, in particular, is declining faster than the market. In Q2 2022, global AI funding decreased rapidly by more than 44% year over year, from $33.6 billion to $18.8 billion, per Pitchbook data shared with Emerging Tech Brew. Over the same period, universal global venture capital funding plummeted by 25%, from $176 billion to $131.7 billion.

Every quarter, global venture capital funding for artificial intelligence and machine learning witnessed a downfall of 26% between Q2 and Q1, a slightly huge margin than the 20% drop for global venture capital as an aggregate. "The market downturn has coincided with AI platform companies, along with some of the largest ones, missing their revenue expectations, and demonstrating that AI start-ups isn't producing enormous growth yet," Brendan Burke, senior analyst for emerging technology at Pitchbook, expressed his thought. "That's forcing a re-evaluation of some of those business models." Many investors are betting that inflation, huge interest rates, and recession distress will prompt companies to redouble efforts to track and control spending, increasing demand for AI tools. At the same time, investors say, many businesses are expected to hit a pause on spending in areas of IT with no instant impact on the bottom line.

Back to Earth

For years, many VCs believed artificial intelligence companies would figure out the path to profitability down the road, Shahin Farshchi, a partner at Lux Capital, told us. Today, investors want to see founders give more thought to how, exactly, they'll build a sustainable business model around AI. "This at all times happens—there's sort of a new [tech] term that becomes a kind of trendy," Colin Beirne, partner at Two Sigma Ventures, said to us. He further added, "It starts as a hobby, and it eventually becomes something very real, and then it becomes something that everyone needs and wants to use. I think AI has gone through that evolution."

At present, Colin Beirne said, VCs are less focused on which companies are the "very best executors of fancy technology." He further said, "That's one thing, but that alone does not make a great company—you have to have all the other pieces on the product side, on the market side, on the customer-acquisition side." As a consequence, Burke said, venture capital investments are starting to trend toward AI tools with near-term commercial use cases, such as data preparation, robotic process automation, computer vision, database management, and natural language processing. "The bull market in 2021 favored some extensive-term sectors, such as autonomous vehicles, that led the vertical in exit accounts, or at least mega-exit count…in 2021," Colin Burke said. "But that mix is shifting in 2022 to focus more on smaller exits for more fundamental and near-term technologies." This has resulted in overall funding in Q2, AI funding declined across every single one of the deal stages, per Pitchbook data.

Primary-stage funding (keeping out an angel and seed rounds) hit $4.2 billion, a downfall from $5.6 billion in Q1—and a fall of over 35% from the same period in 2021. For its part, later-stage funding was down from $18.3 billion in Q1 to $13.4 billion in Q2, good for a 48% drop in comparison to the previous year. In the months to come, Burke prognosticated, some AI start-ups will probably entertain the possibility of being acquired rather than attempting to fundraise in a market with restricted exit opportunities. "Some start-ups that haven't raised recently will see that depressing funding environment and opt to become a part of larger platforms," Burke stated, further adding that "this environment will be a catalyst for that."