What Are We Seeing As VCs - Summer 2024 Edition ☀️

Key takeaway

• For entrepreneurs: Focus on building products with true differentiation and sustainable revenue, as the AI market is becoming more competitive and investors are consolidating around category leaders.
• For investors: While overall AI funding has increased, early-stage deals are declining, suggesting a shift towards backing established players and companies showing real traction.

Summary

The article provides an update on the AI startup landscape as of Summer 2024, analyzing fundraising trends and market dynamics. Despite claims of the AI hype dying down, total investment in AI has increased significantly, with Q2 2024 seeing record funding. However, there's a bifurcation in the market, with mega-rounds for established players and a decline in early-stage deals. The authors observe a shift towards companies producing real products with sustainable revenue, moving away from speculative investments in multiple similar AI startups.

Insights

• Q2 2024 saw a 300% YoY increase in AI investment, driven by megadeals in companies like xAI, Coreweave, and ScaleAI.
• Early-stage (pre-seed and seed) AI deals in the US have sharply declined in both value and count.
• Foundation model companies continue to attract significant funding, with over $7B invested in 2024 alone.
• The term "Generative AI" is falling out of favor, suggesting a broader integration of AI across all technology sectors.
• Successful AI startups often have secure data handling, early access to advanced models or GPUs, deep workflow integration, or focus on niche verticals.
• The market is moving towards consolidation around technical founders building companies with true product or GTM moats.

Implications

• Entrepreneurs need to focus on creating unique value propositions and sustainable revenue models to stand out in an increasingly crowded market.
• Investors are likely to be more selective, focusing on companies that show clear paths to category leadership and sustainable growth.
• The commoditization of base models and dropping AI prices mean that product differentiation is becoming crucial for startup success.
• Vertical-specific AI applications in areas like legal, financial services, and healthcare are attracting significant investment.
• The AI market may see its first AI-native IPO in the next 12-24 months, potentially shifting market dynamics further.
• Big Tech companies continue to play a significant role in shaping the AI landscape through investments, partnerships, and acquisitions.