Technology’s hottest trend can be summarized in two words: artificial intelligence. AI startups racing to innovate and deploy new solutions across a broad range of industries and applications have dominated investors’ attention and money.
While higher interest rates and inflation contributed to a decline in deals and dollars invested in tech businesses overall, AI startups in the U.S. still claimed one of every three dollars invested last year, thanks to several megadeals. Some reports, however, say the flow of money into artificial intelligence may be slowing, and newer AI startups are finding it harder to win over VCs.
That got us wondering: What’s the state of startup funding in 2024? Do founders of early-stage AI startups know where to get funding beyond VC?
How Much Money Is Invested in AI Startups?
SaaS startups dominated VC investments until AI and machine learning (ML) technologies took center stage just a few years ago.
According to a report by the Organization for Economic Cooperation and Development (OECD), AI attracted a 21% share of global venture capital investment in 2020, reaching $75 billion. This marked a steep ascent from less than $3 billion back in 2012, merely 4% of the funding market.
S&P Global Market Intelligence data shows investments into AI businesses (both the total number and value of deals) peaked in 2021 before sharply declining in early 2022, when money became more expensive and investors shifted strategies.
By the last quarter of 2023, there were only 180 private equity and venture capital-backed AI deals, totaling $4.11 billion — a stark contrast to just two years prior, when $13.50 billion was invested through nearly 500 deals. S&P totals exclude the recent mega-investments by Google, Amazon and Microsoft.
These were the five largest funding deals of 2023:
OpenAI, $10B: After Microsoft’s $1 billion investment in OpenAI, numerous reports estimate that its second investment was a cool $10 billion — the largest AI deal in history.
Anthropic, $4B: With nearly $7 billion in total funding, Amazon-backed San Francisco-based Anthropic raised $1.25 billion, with the right to initiate another $2.75 billion.
Anthropic, $2B: Anthropic also claims the No. 3 spot, with a separate investment from Google raising close to $2 billion.
Inflection AI, $1.3B: It’s building the largest AI cluster in the world, and it raised a huge $1.3 billion round from Microsoft, Reid Hoffman, Bill Gates, Eric Schmidt and Nvidia, which valued Inflection AI at $4 billion.
Metropolis, $1.1B: The AI-enabled parking startup raised $1.7 billion in debt and equity.
With recent megadeals included, AI companies are winning a significant portion of invested capital. Pitchbook reported that AI and ML companies captured $68.7 billion (35%) of VC investments in the U.S. in 2023, a sharp increase after hovering around 20% for the last five years.
Crunchbase reported that $4.7 billion was invested in AI companies in February this year, more than one-fifth of all venture funding. It was a significant increase over the $2.2 billion invested in January.
Funding Slowdown: Are AI Startups Still Hot?
AI may be attracting more of today’s limited pool of investment funds, but a handful of companies raising massive rounds has obscured a harsher fundraising environment for many AI startups — it’s an investor’s market, and they want long-term market value.
AI is still hot, but it’s cooled as investors have become pickier.
Crunchbase predicts a slowdown in AI fundraising this year, after observing a trend that showed investors were losing interest in marketing or sales platforms that just “wrapped AI” around their platform. Other news of AI startups having a hard time raising funding has also made headlines.
For startups that operate in or provide artificial intelligence or machine learning tools, platforms, research, and algorithms, the market has become extremely concentrated. More than 72,000 AI and ML startups were on the market in March 2024, and over 22,500 were funded (Tracxn).
The large number of AI startups should not be discouraging, but it does change the game. Simply claiming you have an AI product or platform no longer guarantees you a meeting with an investor; it’s important your AI startup has an attractive, unique value proposition.
Investors want to see tangible use cases and the value your AI tech will create. Does the AI amplify a core differentiator? Does it scale the value you deliver by reducing costs, improving quality, or enhancing efficiency for users?
Today’s hot-yet-selective fundraising environment is more likely to favor AI startups that can show market validation, revenue generation, and both manageable cash burn and acceptable churn. Consider spending your time building the business before raising venture capital, so you can impress investors with traction and healthy financials later.
Building an AI Business Without Venture Capital
AI is evolving rapidly — algorithms are getting more efficient, less computing power is needed, and open source is expanding — which means it’s becoming cheaper to build an AI business. Though you may need growth capital at some point to scale, it is possible to turn your idea into a business with recurring revenue, a strong customer base, and sustainable growth without VC money.
Seamless.AI is a Lighter Capital portfolio company that did just that.
Brandon Bornancin started Seamless.AI to disrupt an entire industry. Seamless.AI organizes the world’s contacts and makes them universally accessible and useful — it makes creating profitable relationships and new revenue seamless.
By 2022 the company had exhibited solid traction but hadn’t unleashed its full potential. Bornancin went looking for funding alternatives that would enable the business to accelerate growth — without giving up equity — and prime the business for long-term success. He discovered Lighter Capital and revenue-based financing.
With $2 million in non-dilutive funding and within just one year, Seamless.AI tripled its revenue, retained its equity, and drove the company valuation up twentyfold. Bornancin tells his story in the video below:
Revenue-Based Financing for AI Companies
As Bornancin puts it, revenue-based financing is a faster, more cost-effective way to grow a startup. It’s a founder-friendly funding option readily available to qualified AI startups that need extra fuel, particularly in a fickle funding environment.
Venture capital is one of the first funding sources many founders go to, but giving up too much equity too soon can result in owning 5% of the company — or losing it entirely. Revenue-based financing minimizes early-stage equity dilution so founders can maximize their growth and ownership value upon exiting.
AI startups that have reached the $200K ARR milestone can use revenue-based financing to gain additional traction and make the business more attractive to potential investors.
How does revenue-based financing work?
You get an upfront injection of capital to invest in your business and repay later, with interest. Unlike a traditional term loan with fixed monthly payments, repayment terms are structured as a fixed percentage of your future monthly gross revenue. As your startup’s revenue fluctuates, your payment increases or decreases accordingly. That way, you can focus on growing your business instead of worrying about making set monthly payments.
Here are 10 good reasons to consider revenue-based financing for your AI startup:
Funding is non-dilutive and does not affect equity or ownership.
Approval is fast and objective.
Funding doesn’t require valuation negotiations, pitch decks, or presentations.
Personal guarantees aren’t required as collateral.
Your business doesn’t have to be profitable.
How you use your funding is entirely up to you.
You decide how to grow, how fast to grow, and when to exit.
Flexible revenue-based payments make managing cash easier.
Funding is tailored to your revenue, so deployment and repayment are manageable.
Funding scales easily with the business as it grows.
Got Revenue? Get Capital to Grow. Keep Your Equity.
Lighter Capital has provided financing to 500+ tech startups, totaling over $300M through over 1000 rounds of funding. Apply in minutes to get up to $4 million in non-dilutive growth capital — no pitch decks, presentations, or business plans required.