By Ariel Solomon
- AI Is booming – Venture Capital funding is pouring into the space, but venture profits are experiencing record-low profits three years in a row
- AI’s market value is set to skyrocket from $136.6B in 2022 to $1.8T by 2030 but with fewer exit opportunities for VCs
It’s rare to read headlines about startups raising millions in Venture Capital (VC) funding, without Artificial Intelligence (AI) being at the forefront of their product offering. That’s because the market for AI has been experiencing rapid growth, going from a valuation of $136.6 Billion in 2022, to an expected $1.8 Trillion by 2030. However, while funds are pouring into AI startups, not a ton is coming back out at the other end. Investors are anxiously awaiting profits on these rather expensive investments, as acquisitions and IPOs – two major ways for them to cash out, have slowed down. In fact, last year, venture funds invested $60 billion dollars more than they collected – a record profit gap.
Why This Matters: As VCs take longer to realize profits, funding of new startups decreases to avoid further impacting their bottom lines. And unsurprisingly, startups that are not at the forefront of the AI craze have been most acutely impacted, as are founders of color, many of which often lead impact-driven and consumer-focused startups. In Q2 of 2024, Black founders were part of only 28 funding deals, the lowest of any quarter since at least 2019. Only a fraction of a percentage of VC funding has gone to black founders this year, a trend moving in an unfavorable direction.
When startups are acquired, this acquisition marks a point at which investors can receive a return on their investment. With recent regulatory red tape, it is taking highly valued companies longer to be acquired, to the point where some deals simply fizzle out. Simultaneously, IPOs offer a way for investors and especially employees, to realize the benefits of their shares, but IPOs have also slowed. Companies have found alternative ways to raise funds, including through VCs; and larger companies elect to use their own profits to continue funding operations. These practices leave investors with fewer options to cash out.
Situational Awareness: This trend will likely become the norm in the immediate future, as VC investments have declined by more than 25% this year and investors are likely to point their dollars towards higher cost, long term investments. As established tech companies like Tesla and Nvidia have enjoyed sizable gains this year, many investors and VCs are watching those stocks with glee, rather than eyeing new startups to invest in.
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