2024 Venture Funding Trends: AI’s Role Amidst Stabilizing Markets

The venture capital (VC) sector, once synonymous with sky-high valuations and rapid growth, is now navigating a landscape marked by cautious optimism and recalibration. As the industry emerges from a period of downturn, investors are shifting focus from hypergrowth to sustainable profitability, with particular attention to sectors like artificial intelligence (AI), clean energy, and cybersecurity.

This article delves into the current state of venture capital, examining the factors driving market dynamics in 2024, the challenges facing startups seeking funding, and the opportunities that lie ahead for investors and entrepreneurs alike. From the revival of IPOs to the evolving role of AI in investment strategies, we explore how the VC ecosystem is adapting to a new era of growth and innovation.

High Valuations Are Out – Bulletproof Business Plans Are In

The venture capital (VC) landscape is undergoing an anemic phase, at best. Having yet to recover from the downturn that affected the sector last year, hypergrowth is out of the picture, but profitability is in play for some venture-backed companies. 

In 2021, the value of some companies in the space hit astronomical highs attributed to low interest rates and abundant liquidity. In 2024, company valuations have become more grounded and realistic, experiencing significant downward adjustments. 

Artificial intelligence (AI) is hot and buzzing, but the remaining sectors in venture capital, like traditional retail, traditional energy, and e-commerce, are decidedly cooler. This results from markets facing high interest rates and rapid inflation from 2022 onwards, resulting in slowdowns. On top of that, investors are shifting their focus to innovative technologies like clean energy and energy storage solutions rather than established practices like retail and traditional energy.

A less overvalued IPO market in 2024 has become a key driver for moderately higher investments and more accessible valuations, indicating a slow resurgence since its last known ‘winter’ of 2023. Ultimately, what went up needed to come down. With valuations course correcting to traditional levels, interest from venture capitalists and corporate buyers is expected to rise. 

Regarding the priceability of startups in the market, findings demonstrate that investors are no longer buying into the concept of reasonable valuations alone as signifiers of good investments (take a look at WeWork in 2019). The days of young founders racing to raise $100 million in capital with scarcely formed business models, products, or customers and short-term exit strategies at the time of launch are long gone. 

Aside from bullish indicators like IPO activity, the market exhibits signs of slowly escaping a downturn cycle. Plenty of avenues exist amidst rapidly advancing technology for investors looking to deploy capital. Cybersecurity, cleantech, and energy are two sectors to watch for in the coming decades. Phishing episodes and other digital threats like exploits, cyberattacks, and identity theft are still prevalent. Emerging AI technologies and digital tokenization of assets are rapidly prioritizing cybersecurity. Venture capital investors are also increasingly focusing on sustainable and climate tech-related start-ups.

The bottom line is that although experts might characterize the current state of the VC industry as coming out of a winter phase, there is still a warm climate for promising startups. Funding opportunities are still available for businesses with potential yet to be proven, such as specialized biotech firms and renewable energy solutions. Investment firms and VCs still have record-high amounts of dry powder from 2021, waiting to be deployed on innovators and cutting-edge tech novelties. 

Cautious Growth Alongside IPO Revival

Although liquid assets available for use are significant, securing venture capital funding remains highly challenging. U.S. venture capital fundraising showcased a slow start in 2024 after 2023 hit a six-year low. In 2024, only 100 venture capital funds were created in the US, a number that hovered slightly over the previous decade-low figure of 99 funds in 2023. The amount of capital raised by these funds also stayed at a decade low, underscoring the difficulty in attracting new capital into the VC asset class.  

Still, even with investors' cautionary approach, Q1 of 2024 saw mild growth in global venture capital funding. According to Bain & Company numbers, global VC funding grew approximately 16% quarter over quarter, reaching $89 billion distributed over 4600 deals. The most significant spike in the US happened thanks to large investments in generative AI, clean energy, and healthcare, increasing 72% in funding quarter over quarter in 2024. 

More specifically, regarding exit activity, the first half of 2024 saw an IPO market characterized by cautious optimism and selective growth. IPO levels are good market indicators because they reflect investor sentiment, market health, capital flows, trends, and the overall performance of startups. 2024 had IPO successes like Stripe, Instacart, and Reddit that could have created a more solid narrative toward market recovery, but overall, investor sentiment still remains vigilant.

The market is slowly regaining momentum due to valuations beginning to recover from the lows of the last two years. Still, high interest rates and geopolitical conflicts are prompting investors to do thorough due diligence before committing to new investments. This gradual revival of IPOs means confidence in the potential of these companies is growing. For investors, it is not just about liquidity influx but the promise of innovation and transformative technology reaching wider audiences. 

The remainder of 2024 may also see a clearing out of a backlog of companies that had planned to go public but were waiting for the market to improve or for lower interest rates, with examples like the AI company Databricks. According to EY data, the positive market sentiment of the IPO resurgence could extend into the rest of 2024. 

AI's Investment Boom and Challenges

Following a bullish note from a mild IPO resurgence, the AI and Generative AI sectors currently dominate and bolster the venture capital landscape. Large language models, a subset of AI that focuses on understanding and generating human-like text, saw the majority of the funding share due to their capital-intensive nature. 

It is no secret that 2023 opened with a massive OpenAI deal that clocked in at $10 billion. OpenAI continued the hype around artificial intelligence with the broader widespread adoption of ChatGPT, causing tech giants like Google, Bing, and Meta to follow its steps. There has also been a noticeable rise in corporations partnering with startups to adapt generative AI to be accessible to their customers. An increasing number of non-tech corporate venture capital (CVC) investors hopped on the AI trend, such as CVS Health and LG Technology Ventures, which front-run deal activity globally in 2023. The trend continued into 2024, with more CVCs from non-tech sectors investing in AI startups.

Generative AI has also emerged as a powerful tool for investing. Traditional due diligence for startup investing has historically dealt with inefficiencies from tying up resources and sorting through long documents and large amounts of data. Market comparisons and performances usually were done manually. This represented a ‘needle in the haystack’ endeavor that was time-consuming and gave limited visibility on a particular subject.  

According to Gartner, it is estimated that by 2025, more than 75% of venture capital and early-stage investor executive reviews will be informed using AI and data analytics. This percentage reflects a deep shift in asset management procedures and leaves behind previous archaic research methods. 

AI also adds value in auditing by tackling the more ‘mundane’ chores, such as data collection, processing, and repeatable tasks, making people feel more valued and fulfilled in their daily work. By placing all the energy on more strategic and complex areas requiring a higher dose of creativity and empathy, human emotional intelligence can be used while performing those skills. AI also allows more time to take a longer-term, broader perspective on the business and operation, less tied to automated tasks that often impose deadlines.  

Currently, countless industries are feeling the heat to show they can enhance efficiency by merging AI into their healthcare, finance, customer service, or autonomous vehicle operations. Now that real-world applications of AI are plentiful, the VC ecosystem will want to cash in on that pressure in 2024. 

Nevertheless, the AI trend has yet to fulfill its highly expected potential. Stakeholders, including environmental groups, researchers, and industry experts, are starting to realize that AI uses too much electricity, and it is unclear if enough clean energy will suffice for everyone. The global energy system is already struggling with new sources of power demand. AI lacks a robust regulatory framework and has recently faced high-profile legal battles.

Still, investors funneled $27.1 billion into the technology, which made almost half of the $56 billion in U.S. start-up financing from April to June 2024, according to PitchBook. These numbers appear defiant of the current downturn. However, unlike the early internet, AI still has to prove long-lasting benefits and has yet to absorb all the liquidity in the space. 

Tips for Entrepreneurs Navigating Fundraising

Before AI technology came into the picture, the liquidity boom from 2021 that fueled venture capital gave the market the impression that entrepreneurship had become more accessible. It is not, and obtaining funding is certainly not getting easier. Now more than ever, investors are taking the time to know the company founders and their plans for the future, looking closely under the hood of their operations. 

Keeping that in mind, we recommend being open to varying views on valuations. Markets may have changed significantly since the last time rounds of capital were raised. Avoid rigid views on valuations, which may hurdle deals, and maintain a degree of malleability in negotiating terms that can ultimately result in benefits different from expected. 

Despite the challenges of a higher cost of capital context, entrepreneurship will always find a way to thrive. Startups that survive the current funding drought will have experienced executive-level leadership and compelling customer-centric solutions. These prospects have higher odds of securing financing versus riskier, more underdeveloped counterparts. 

Tips for Building Value Amid Uncertainty

While the broader VC markets remain cautious, marked by lower valuations and slower funding, the moderate resurgence of the IPO market gives an optimistic outlook for the remaining half of 2024 and 2025. Artificial intelligence, cloud computing, cybersecurity, cleantech, and sustainability are emerging as focal areas of interest. Given unresolved energy consumption issues, the long-term sustainability of AI´s boom is still uncertain. The pursuit of clean energy to support dependent industries remains as prevalent as ever. 

Here are some fundamentals entrepreneurs should consider given the current venture capital market:

• Focus on creating and building something the world needs and find people who agree with the project thesis and believe in its executive ability.
• Recognize that investors are more discerning with their capital, performing due diligence to find real value in business operations.
• Keep in mind the high failure rate that is common in startups. Therefore, it is critical to uphold the fundamentals by ensuring the financials are sound, transparent, and accurately reported.
• Establish experienced and thoughtful leadership early on. Develop a fully mapped-out path that leads to growth and profitability.

High Valuations Are Out – Bulletproof Business Plans Are In

In conclusion, the venture capital landscape 2024 presents a complex but evolving picture. While challenges such as high interest rates, cautious investor sentiment, and the need for grounded valuations persist, the slow resurgence of the IPO market and the promise of innovation in sectors like AI, cleantech, and cybersecurity offer reasons for cautious optimism.

For entrepreneurs and investors alike, success will depend on a keen understanding of these dynamics, a focus on long-term value creation, and a readiness to adapt to an ever-changing environment.

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