AI boom leads US VC to record the largest investment in three years

Author: George Hammond, Financial Times; Translated by: Baishui, Golden Finance

US startups have raised more money than at any time since 2021 as investors are optimistic about artificial intelligence, but the venture capital market has tilted heavily towards funding a small number of large private technology companies.

According to PitchBook data, More than $30 billion has been invested in emerging groups this quarter. Another $50 billion in financing is in the works as venture capitalists work on a series of major deals involving OpenAI, Safe Superintelligence and defense technology startup Anduril.

The frenzy over artificial intelligence has driven investors to invest at the fastest pace since the market peak in 2021, during which $358 billion poured into tech groups, saddled many companies with unrealistic valuations.

But venture capital groups think this investment cycle will be different. “AI is a transformative force that can make these companies better,” said Hemant Taneja, chief executive of General Catalyst, one of Silicon Valley’s largest venture capital firms.

“The way to think about it is ‘Can these businesses reasonably grow 10 times from where they are now?’ The answer to all of them is yes, so they are reasonably priced,” he added.

After two years of sluggishness, U.S. funding jumped to about $80 billion in the final quarter of 2024, according to PitchBook. That was the best fourth quarter since 2021. But just six large deals (involving OpenAI, xAI, Databricks, and others) accounted for 40% of the total, said Kyle Stanford, PitchBook's head of research.

"It's a very elite group of companies that are dominating venture capital," he added.

Based on the deals that have already closed and those expected to close in the coming weeks, investment levels will be similar in the first quarter of this year - which would make it the best first quarter for funding since 2022.

In the past two weeks alone, fintech companies Stripe and Ramp announced funding rounds at valuations of $91.5 billion and $13 billion, respectively, and AI startups Anthropic and Shield AI signed deals for $61.5 billion and $5.3 billion, respectively.

Venture capital firms are also making a series of large investments. OpenAI is in talks with SoftBank to raise $40 billion at a $260 billion valuation, which would be the largest funding round ever, surpassing the $10 billion investment in Databricks late last year.

Anduril, founded by Palmer Luckey, is in talks to raise at least $2 billion at a valuation of more than $30 billion, more than double its valuation in a funding round last summer, according to two people familiar with the matter.

These more mature companies have hundreds of millions or billions of dollars in annual revenue and are growing quickly. General Catalyst’s Taneja, who has invested in Anduril, Anthropic, Ramp and Stripe, said that makes them relatively safe bets.

“The path to making money in AI is very murky, and a lot of capital ends up being concentrated in the industry leaders that have a customer base and a big market,” he said.

But enthusiasm for AI is also boosting younger companies with no revenue or even products.

Safe Superintelligence, founded last year by OpenAI co-founder and former chief scientist Ilya Sutskever, raised $1 billion at a $5 billion valuation and is in talks to raise new capital in 2024 at a valuation of $30 billion or more, according to two people with direct knowledge of the deal.

The massive round being raised marks a major departure from traditional venture capitalism, which targets emerging companies and is governed by a “power law” where the best startups in a portfolio will make up for the losses of the rest that fail.

“We’ve always assumed that a 50x return [for venture funds] would come from their seed investments exiting at IPO,” said PitchBook’s Stanford.

In an untested experiment, that logic is now being applied to firms that are several orders of magnitude larger and more established, which Stanford calls “pseudo venture capital firms.”

These include Josh Kushner’s Thrive Capital, General Catalyst and Lightspeed Venture Partners, all of which have invested in several big funding rounds in recent weeks. All three are registered investment advisers, which enables them to invest in a wider range of asset classes and hold onto companies after they go public.

The three firms have also each raised more than $5 billion in funds, giving them “sufficient scale to invest in startups valued at $1 billion and hold them for 15 years until they reach $50 billion, investing in multiple ways along the way,” Stanford said.

Sebastian Mallaby, author of The Power Law, believes that even the most expensive startups can grow 10 times, a belief that “has fund managers rushing into big names with enthusiasm, saying, ‘Who cares what I paid? I’m a genius and I can get into this.’”

While it’s less likely that a mature company will fail, it’s also less likely that its valuation will increase tenfold or a hundredfold, Mallaby warns. “The habits that work well in early-stage investing need to be adjusted when you get into larger rounds.”

The large rounds discussed today represent “a completely different style of venture capital than I’ve experienced,” Stanford said.

The peak of venture capital in 2021 was marked by rising round sizes and valuations: there were about 854 deals of $100 million or more that year, according to PitchBook. This year, total investment is close to 2021 levels, but the market is becoming increasingly unbalanced.

“If you’re OpenAI or Anduril (a high-growth, established brand), you’re very well positioned. The money is there with you…If you’re on the other side, like most companies, the money isn’t there,” Stanford said.

“Maybe it ends up being $80 billion [raised this quarter], but $40 billion of that was just one round…Even the outliers in 2021 are tiny compared to this.”