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Depending on where you stand in the investment world, venture capital businesses are either in very good health or facing existential threat.
Like many in the technology industry these days, startup investors have been heavily backing artificial intelligence. The latest evidence came in this week’s news that Databricks, a provider of software that collects and analyzes large amounts of data, has raised another $10 billion in one of the largest private investment rounds in history. .
Their willingness to invest large sums of money that once required Wall Street involvement highlights how some major venture investors are navigating the AI boom with a unique sense of coercion. Showing.
But doubling down on AI usage coincides with a period of severe indigestion for the startup investing world at large. The industry is just barely beginning to weather the massive investment from the start-up Zirp era, a period that ended in 2021 when zero interest rates pumped money into tech startups.
This leaves about $2.5 trillion locked up in privately held unicorns, or companies valued at $1 billion or more. At least, that’s the total value these companies have claimed since their last funding, according to PitchBook. If they actually try to cash out those chips through an initial public offering or the M&A market, the returns are likely to be much lower. It is difficult to predict how much of a business venture will survive its final liquidation.
First, consider the scale of the bet on AI. Databricks had planned to raise $3 billion to $4 billion in its latest funding, but CEO Ali Ghodshi said investors offered $19 billion (he split the difference). (I decided to roughly divide them.)
Databricks’ latest valuation isn’t outlandish given the overwhelming demand levels. The $52 billion before adding new cash is up from $43 billion 15 months ago and represents about 17 times the annual revenue run rate. This is not outrageous for a company growing at 60% per year.
Private funding rounds of $1 billion or more were once rare. Breaking the mold took big ambitions from SoftBank’s Vision Fund and a small group of specialized late-stage investors. Now, investors like Thrive Capital, which led the Databricks round, are proud to have raised $1 billion alone.
AI model builder OpenAI, Anthropic, and Elon Musk’s xAI have raised nearly $40 billion between them in the past two years. Other big investment rounds this week alone include $500 million to Perplexity, an AI-powered search engine, and Vultr, part of a new family of companies operating specialized cloud data centers that support AI. includes $333 million.
What makes this boom in private support for AI even more remarkable is that it comes against the backdrop of a broader collapse in venture investing. Two years later, venture capital investment has plummeted by 55% to $161 billion, compared to 2021, a booming year before the interest rate cycle changed, according to Pitchbook. The number of investors who completed deals in the first nine months of this year was less than half the number in all of 2021.
Fewer, bigger funds are injecting increasingly large amounts of money into an increasingly narrow range of companies, most of which are AI-related companies. This is a far cry from the model on which the venture was founded, which involved distributing investment seed corn in small quantities and widely distributing it. The occasional big hit will make up for many mistakes.
However, the concept of VC itself has changed. In many ways, private capital markets for technology now rival Wall Street. While returns will inevitably fall when more capital is invested in more mature companies, successful investors will undoubtedly stand to earn higher returns than similarly sized funds investing in other asset classes. I would point out that there is.
For many other venture investors, the situation is on the verge of crisis. After a brief boom in 2021, IPOs and sales to strategic buyers have fallen off a cliff. With less cash being returned, many investors backing VC funds are reluctant to commit more money. Many startups that achieved unicorn status during the boom want to cut costs and conserve cash rather than come back to raise more money at lower valuations. It will take time for this to work system-wide, but the reality is that much of Zirp’s valuation will no longer be supported.
Investors in the latest big AI funding round will be hoping to escape a similar fate. Companies like Databricks, which says it will be cash flow positive this quarter, already appear ready for an IPO. 2025 could then be a pivotal year for VC’s recent investment boom.
