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Sapphire - July 2024 Market Memo.pdf

Key takeaway

• For entrepreneurs: Despite a potential "trough of disillusionment" in AI, opportunities for scaling AI-driven startups across diverse categories continue to expand.
• For investors: While AI hype may be cooling, the fundamental build-out of AI infrastructure and long-term potential remain strong, suggesting a need for patient capital.

Summary

Sapphire Ventures' July 2024 Market Memo suggests the AI market may be entering a "trough of disillusionment" phase, characterized by increased scrutiny of AI investments, product delays, and leadership shakeups at AI startups. However, the memo maintains a long-term optimistic outlook, citing continued infrastructure build-out, emerging scaled AI businesses, and diverse venture funding across AI categories.

Insights

• Global VC investment in July 2024 totaled $24B across 1.7K deals, showing a slight increase in capital invested but a decline in deal count year-on-year.
• AI-focused areas saw $8.0B in investment across 675 deals, indicating continued strong interest in the sector.
• Major tech companies remain committed to AI infrastructure investment, despite increased investor scrutiny.
• Several well-funded AI startups (Inflection, Adept, Character.AI) have seen leadership teams depart for larger tech companies.
• Product delays and mixed reviews for highly anticipated AI products have contributed to dampened enthusiasm.
• Venture funding for AI remains elevated and diverse across categories, with investment at platform and application layers expanding significantly.

Implications

• The AI market may experience a period of recalibration as expectations align with the realities of product development and market adoption.
• Large tech companies are likely to continue dominating AI development due to their resources and ability to attract top talent.
• Investors may need to adjust their expectations for returns and timelines in AI investments.
• Entrepreneurs in the AI space may face increased pressure to demonstrate clear paths to profitability and product-market fit.
• Regulatory scrutiny of AI acquisitions and partnerships may increase, potentially impacting exit strategies for AI startups.