Global venture capital funding falls sharply in first half despite AI frenzy

The 48% decline in investment to $173.9 billion and the 19% drop-off in deal numbers comes despite huge interest in artificial intelligence startups sparked by the success of OpenAI’s ChatGPT.

Investors poured more than $40 billion into AI startups in the past six months, the data showed. That includes a $10 billion investment by Microsoft in OpenAI and $1.3 billion in funding for rival Inflection AI.

By region, Latin America had the biggest drop with an 86% slump while the U.S. and Europe fell 65% and 69% respectively.

Investors say that not only have higher interest rates caused a rethink of valuations, the current IPO drought and lack of other exit opportunities has made them more selective.

“I haven’t written any checks in the past 18 months,” said Kevin Colleran, a cofounder at early-stage firm Slow Ventures. “I have 30 portfolio companies that I need to help figure out how to survive. There is no point for me to add to the misery.”

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PitchBook said large investors weren’t actively participating in venture funding and outsized deals that had pushed deal values to records were no longer happening. Venture capital funding globally hit an annual record of $745.1 billion in 2021. Funding activity has fallen across all stages, with the first seed round logging the biggest drop with a 44% decline in the number of deals in the US

Many firms that secured funds in 2021 are still sitting on a considerable amount of money and feel little need to come back to a market that expects much lower valuations, investors said. But they added that a moderate pickup in demand could emerge in the second half.

“More companies will have run low on cash and will need to come to market to fully finance their plans,” said Mary D’Onofrio, a partner at Bessemer Venture Partners.