Venture capital funding plunges globally in first half despite AI frenzy

Venture capital funding globally almost halved in the first six months of 2023, data from research firm PitchBook showed, highlighting a lack of enthusiasm on the part of investors as well as less demand amid sharply higher interest rates.

The 48 percent decline in investment to $173.9 billion and the 19 percent 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 percent slump while the U.S. and Europe fell 65 percent and 69 percent 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 co-founder 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.”

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- percent decline in the number of deals in the U.S.

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.