Tighter VC capital forces AI startups to face the music

inter may hve arrived early for AI and machine learning startups. After years of rosy projections, growth and investor enthusiasm, a new report from PitchBook shows that VC activity in the AI sector declined precipitously over the past few months.

Deal value growth in AI startups was down 27.8% quarter over quarter in Q2 2022, with overall investments reaching $20.2 billion across 1,340 deals. Year to date, VCs have funneled $48.2 billion into AI startups across over 3,000 deals — which sounds healthy but actually represents a 20.9% year-over-year dip.

AI funding declined across all deal stages, per PitchBook data. Excluding angel and seed rounds, early-stage investments hit $4.2 billion, a drop from $5.6 billion in Q1 and down 35% from the same quarter last year. Meanwhile, later-stage funding declined from $18.3 billion in Q1 to $13.4 billion in Q2 — a 48% decrease compared to last year.

As VC deal value and deal count in AI startups reach their lowest levels since Q4 2020, it’s not just investors that are pulling back.