AI Drives Venture Activity, but Broad Opportunities Remain 

After a significant slowdown in 2022 and 2023, venture capital has shown signs of life this year. Artificial intelligence (AI) is driving this resurgence, as much of the uptick in deal activity is attributable to a pickup in investment around the technology. 

Notably, deal count in the 2024 second quarter was the highest since early 2022. Deal value in that quarter was roughly double that of each of the prior three quarters. AI received nearly 50% of deal value in the U.S. venture-capital market in the 2024 second quarter. This was driven by deals for CoreWeave ($8.6 billion) and xAI ($6 billion). Early-stage valuations for AI companies increased by 35% from last year while late-stage valuations more than doubled. Remarkably, 42% of all new unicorns in 2024 were AI companies. 

This trend shows no sign of slowing. 

OpenAI, creator of ChatGPT, is considering a new round of funding that would value the company at more than $100 billion. While OpenAI expects revenues to reach $3 billion this year, it could see losses of $5 billion on the year as it continues refining its chatbot and virtual-assistant software. 

Short-term losses like that will be hard for most investors to stomach, but in the long run, AI will likely spawn significant companies, creating sizable return potentials. The key for investors will be disciplined due diligence and an understanding of each company’s specific opportunity and roadmap for growth. 

Despite the AI enthusiasm, the current landscape offers attractive opportunities across the board. Overall, venture-investment activity remains below recent highs, potentially presenting overlooked opportunities. Investing in innovation remains attractive, particularly as investor appetite for venture capital has pulled back. Further, some indicators on valuations appear to have normalized. An index of venture-backed companies that recently went public via an initial public offering (IPO) are trading at levels of price-to-revenue multiples close to the golden years of 2014 to 2016 that saw Alibaba, Fitbit and Trivago go public.