AI hasn't stemmed the yearslong startup downturn; PitchBook: US venture funding fell by almost half in Q2 2023, as generative AI investments rose 65% to $3.3B
Venture investors are realizing that generative artificial intelligence might not be enough to stem yearslong startup downturn
Context & Ripple Effects
Generative AI investment was already accelerating before this quarter: PitchBook had recorded more than $1.37B invested across 78 generative-AI deals in 2022, and the ChatGPT launch helped trigger a broader VC rush into AI startups.
This report puts that enthusiasm in context: AI was attracting a growing share of attention while the wider startup market remained weak, consistent with contemporaneous coverage of falling valuations and scarce late-stage financing outside generative AI.
First-order effects
- US venture-backed startups face a substantially smaller overall funding pool in Q2 2023, increasing pressure on companies seeking new rounds.
- Generative-AI startups gain a relative funding advantage as investment in the category rises 65% to $3.3B despite the broader decline.
Second-order effects
- Investors are likely to concentrate diligence and available capital on AI opportunities, leaving non-AI startups to compete more intensely for fewer deals and later-stage rounds.
- The divergence makes AI fundraising totals a less reliable proxy for the health of the overall venture market: a hot category can coexist with weak aggregate startup financing.
Third-order effects
- If this allocation pattern persists, venture markets may become more bifurcated, with a small set of AI themes drawing capital while other sectors face a longer reset in valuations and financing availability.
- Later coverage of AI capturing nearly half of US startup funding in Q2 2024 suggests this was an early signal of funding concentration rather than a broad-based venture recovery.
The trend: Generative AI is becoming a capital-concentrating force within venture funding, able to expand even when the broader startup market contracts.