AI hype sends funding for the sector's startups soaring to $17.9 billion, defying a broader tech slump

AI hype sends funding for the sector's startups soaring to .9 billion, defying a broader tech slump

Multibillion-dollar investments in artificial intelligence startups have become almost commonplace in Silicon Valley — with dollars raised for AI companies outpacing funding totals in every other category of tech, and reaching $17.9 billion in the third quarter. 

According to PitchBook data compiled for Bloomberg, the value of funding for AI companies climbed 27% globally in the third quarter compared to the year before. That’s even as overall deals for startups fell 31% from a year earlier to hit $73 billion worldwide. 

The opposing trend lines highlight a divide between AI startups and the rest of the industry. Rising interest rates and a post-pandemic slump have hammered VC funding, making AI one of the venture capital world’s lone bright spots. In particular, so-called generative AI technology has dazzled users and investors with its ability to generate photo-realistic images and human-sounding text in response to just a few words of prompts, and has brought in billions in funding for the largest companies. 

Some VCs have compared the AI boom to the advent of the consumer internet. “This is the web moment, the HTML moment, for generative AI,” said Praveen Akkiraju of Insight Partners. Just as the internet had existed for years before user-friendly interfaces brought it into widespread use, AI is surging because easy-to-use programs like OpenAI’s ChatGPT are gaining traction, he said.

The excitement has overshadowed a larger tech slump. While companies like OpenAI dominate the headlines, most categories in tech, including information technology hardware, healthcare services and consumer goods, fell compared to the same year-ago quarter, according to PitchBook.

Even AI is not wholly immune to startup pressures. Total fundraising for the industry is still less than it was two years ago, during the height of the pandemic tech boom. And its success has been driven largely by big deals for a few standout companies, including Anthropic and OpenAI.

The extent of the AI hype has prompted a wait-and-see approach in the rest of the industry. Take enterprise software, a hot category just a few years ago. During those boom times, venture capitalists were buzzing about enterprise software, due in part to blockbuster initial public offerings from companies such as UiPath Inc. and Snowflake Inc. 

One startup that benefitted from the buzz in 2021 was Kong Inc., a business that helps manage the ways software applications talk with each other. It raised $100 million at at a valuation of $1.4 billion in a deal led by Tiger Global Management, with others like Goldman Sachs Group Inc., Index Ventures and CRV participating.

Kong is still doing well, with more cash flowing into the business than out in several recent months, said founder Augusto Marietti. His business is growing from the AI boom, because more AI means more data infrastructure, which drives demand for his product. Still, there’s no escaping that the spotlight has moved onto pure AI companies.

In the last earnings season, Marietti grew weary of hearing company after company mention AI at every opportunity. He took comfort in Apple Inc.’s earnings release, which stood apart in not mentioning it — and Apple’s stock soared regardless.

Kong is integrating AI capabilities, Marietti said, but that doesn’t make it an AI company. It also doesn’t mean it can’t keep growing and become very profitable.

“We don’t need to have an identity crisis,” he said. “Just keep at it.”

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