Persistent AI hype fails to buoy startup market in Q1

It’s been a tough time for startups, and things didn’t show signs of improvement in the first quarter.

The quarterly aggregate value of deals between venture capitalists and startups dropped to its lowest level since 2017, PitchBook data showed this week. VC funds also struggled to raise money from investors; venture capitalists collected just $9.3 billion in capital last quarter, only 11.3% of the total amount they raised in 2023, which was already a sluggish year.

Outside of some eye-popping AI investment, the startup market has been struggling since federal interest rate hikes beginning in 2022 made riskier venture capital bets less appealing. PitchBook’s lead US VC analyst, Kyle Stanford, said in the report that “sticky inflation” and the possibility of a recession mean this isn’t likely to change soon.

In terms of positives, Stanford noted that startup valuations saw a slight bump across all stages of growth, which he attributed to “relatively strong performance from public markets and slight multiple expansion.”

Investors also continue to be excited about AI, which Stanford said accounted for many of the new funding rounds this quarter.

“A lot of investors see it as this new technology revolution, whether it be getting companies more efficient or opening up new applications for entrepreneurs to develop using AI,” Stanford told Tech Brew.

In terms of exits, two IPOs—Reddit and chipmaker Astera Labs—accounted for nearly three-quarters of all exit value in Q1 and stoked optimism about possible exits after a slow two years, according to Stanford. But he added that “investor appetite for high-risk, money-losing companies that aren’t able to tell their story through the growth of AI” remains unproven. M&A deals were mostly “immaterial in size.”

Looming lack of funds: Stanford said that VCs’ paltry fundraising haul might not have much effect on startups today, since many funds are still coasting on money raised during boom times. But it could ultimately present problems for early-stage startups.

“As we get to this area where those 2021, even early-2022 funds start to get up against their new investment timeline—it might be a year away or even a year and a half away—then you start seeing these low fundraising figures with low fund counts start to put extra added pressure on early stages of VC—those have been kind of insulated so far, because of the number of funds that have been raised over the past few years.”