Macro

AI Hype Can't Warm Venture Chill, Deals at 2017 Low with $36.6B

U.S. venture deals hit 2017 low despite AI hype, while IPOs and tech giants' investments signal market optimism and strategic shifts.

By Mackenzie Crow

4/3, 17:16 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
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Amazon.com, Inc.
Alphabet Inc.
Microsoft Corporation
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Key Takeaway

  • U.S. venture deals in Q1 hit the lowest level since 2017 at 2,882 transactions totaling $36.6 billion, down 62% from late 2021 peak.
  • Despite AI startup excitement, overall venture funding remains subdued amid inflationary concerns and steady interest rates.
  • Signs of market revival seen in Reddit and Astera Labs IPOs, contributing to 73.4% of U.S. exit value in Q1.

Venture Funding Freeze

Despite the buzz around artificial intelligence (AI) and a few high-profile investment rounds, the broader venture capital landscape is experiencing a significant chill. Data from PitchBook reveals that U.S. venture deals in the first quarter dropped to their lowest since 2017, with a similar downturn observed globally. The total deal value has regressed to 2019 levels, indicating a cautious stance from venture capitalists amid inflationary pressures and rising interest rates. The Federal Reserve's indication of potential rate cuts in 2024 has yet to thaw the icy investment climate, with the timing of such cuts remaining uncertain.

IPOs Signal Market Optimism

In contrast to the venture funding slowdown, the initial public offering (IPO) market has shown signs of life with Reddit and Astera Labs making notable debuts. This resurgence of IPO activity, after a significant lull, suggests a growing optimism in the market. Rubrik's recent move to file for an IPO adds to this positive momentum, indicating a potential thaw in the IPO market. These developments hint at a selective but growing confidence among investors, looking for solid opportunities amidst a cautious broader environment.

AI Investment Surge

The excitement around generative AI has led to a surge in investments, with tech giants like Amazon, Microsoft, and Google leading the charge. Amazon's investment in AI startup Anthropic marks its largest venture deal, highlighting the strategic importance of AI. This trend is underscored by a significant increase in AI deal value, with investors eager to secure a stake in the burgeoning AI ecosystem. The strategic nature of these investments, often involving cloud services and technology deployment, points to a deep integration of AI into the future strategies of these tech behemoths.

Street Views

  • PitchBook Analysts (Neutral on the venture funding environment):

    "Sticky inflation has pushed hope of interest rate cuts to the back half of the year, and recession remains a possibility. We don’t expect deal activity to pick up in a meaningful way in the near term."

Management Quotes

  • Jerome Powell, Fed Chairman:

    "It will take a while for policymakers to evaluate the current state of inflation, keeping the timing of potential interest rate cuts uncertain."