AI deals lift US venture capital funding to highest level in two years, data shows

By Krystal Hu

(Reuters) - U.S. venture capital funding surged to $55.6 billion in the second quarter, marking the highest quarterly total in two years, according to PitchBook data published on Wednesday.

The latest figure shows a 47% jump from the $37.8 billion U.S. startups raised in the first quarter, largely driven by significant investments in artificial intelligence companies, including $6 billion raised by Elon Musk's xAI and $1.1 billion raised by CoreWeave.

Investors' ongoing excitement around building and adopting AI technology, which could potentially bring significant returns, has fueled the recovery of venture capital (VC) funding.

After reaching a record high $97.5 billion in the fourth quarter of 2021, U.S. VC funding had been steadily declining. It hit a recent low of $35.4 billion in the second quarter of 2023, amid a high interest rate environment and a sluggish exit market.

The recent influx of capital into AI startups has reversed the downward trend, prompting more investors to double down on AI foundation model companies as well as applications from code generation to productivity tools.

Despite the increase in deal activity, exits remain challenging, the data shows, as small deals generated about $23.6 billion in exit value in the second quarter this year, down from $37.8 billion in the first quarter. The initial public offering market has struggled to gain momentum, even after some VC-backed companies such as cloud data management company Rubrik, went public.

"For VC returns to see an increase, large tech companies must begin to list publicly at a higher pace than we have seen through the first half of the year," Pitchbook analyst Kyle Stanford said in a statement.

Emerging VC fund managers may have already felt the pressure of a lack of proven returns, with only $37.4 billion in commitments raised through the first half of the year. Large firms dominated the fundraising, with Andreessen Horowitz alone closing new funds with more than $7 billion.

(Reporting by Krystal Hu in New York; Editing by Jamie Freed)