Over the past months, AI has emerged as the proverbial golden goose of the tech industry, gaining the attention of industry giants such as Microsoft, Apple, and Amazon. The ongoing AI boom has not only revolutionized sectors from healthcare to finance but has also spurred a frenzy of investments, with billions pouring into AI startups. The numbers speak for themselves: investments in AI startups have skyrocketed, with a remarkable $24 billion invested from April to June 2024. This figure more than doubles from the previous quarter, according to a Crunchbase report.

The increase in AI investments has been a key driver of the overall growth in startup funding. In the last quarter, total startup funding grew by 16%, reaching $79 billion. This growth was primarily fueled by the influx of capital into AI startups, which for the first time, became the largest sector for startup investments, surpassing traditionally dominant fields like healthcare and biotech.

Several factors have contributed to this surge in AI investment. One key driver is the runaway success of OpenAI’s ChatGPT, a large language model capable of generating realistic and coherent text formats. ChatGPT’s capabilities have ignited a fierce competition among businesses to adopt the latest AI advancements across various industries. This sentiment is further solidified by the recent mega-funding rounds secured by prominent AI companies. Elon Musk’s ambitious xAI project grabbed headlines with a whopping $6 billion raised. Similarly, AI infrastructure provider CoreWeave secured $1.1 billion, highlighting the crucial role of robust infrastructure in supporting the development and deployment of advanced AI solutions. Other notable deals include billion-dollar rounds for companies like Wayve (automated driving), Scale AI (data preparation), and Xaira Therapeutics (AI-powered biopharmaceutical research).

However, despite the excitement surrounding AI, the broader funding environment remains cautious. While overall startup funding grew by a modest 16% to $79 billion in Q2’24, this figure falls short of pre-downturn levels. The first half of 2024 saw global funding reach $147 billion, reflecting a 5% year-over-year decline and stagnation compared to the second half of 2023. This cautious sentiment is likely fueled by the ongoing tight monetary policy in the US, which has dampened the revival of initial public offerings (IPOs). Traditionally, successful IPOs have been a crucial exit route for investors in the startup ecosystem, allowing them to recoup their investments and generate returns.

This cautiousness is evident when examining funding trends across different stages. While late-stage funding witnessed a slight increase, reaching $36 billion from $33 billion in Q2’23, these large investments primarily targeted established players. The focus areas for late-stage funding included AI foundation models, AI infrastructure companies, autonomous driving ventures, electric vehicle startups, cybersecurity firms, drug development companies, and quantum computing players.

Seed funding, on the other hand, has displayed remarkable resilience throughout the funding slowdown. Seed investments have averaged around $8 billion per quarter over the past five quarters. While seed funding has decreased compared to peak periods, the decline is significantly less compared to early and late-stage investments. This trend suggests that companies are likely staying in the seed stage for extended periods due to the current funding environment.