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Depending on where you stand in the investing world, the venture capital business is either in poor health or facing something of an existential crisis.
Like many people in technology these days, investors in startups have backed AI to the hilt. The latest evidence came with news this week that Databricks, a company that provides software to collect and analyze large amounts of data, He was aroused And another $10 billion, one of the largest private investment rounds ever.
Their willingness to put up the kind of large sums that previously required Wall Street's involvement shows how some of the largest… Adventure investors They navigate the AI boom with characteristic swagger.
But double Amnesty International This coincided with a period of extreme indigestion for the startup investment world in general. The industry has barely begun to work its way through a massive backlog of investments from the Zirp era of ventures — a period that ends in 2021, when the zero interest rate policy brought a flood of capital into tech startups.
This has left about $2.5 trillion locked up in private unicorns, or companies worth $1 billion or more. At least, that's the combined value these companies demanded after their latest fundraising, according to PitchBook. When it comes to actually trying to leverage these chips through initial public offerings or the M&A market, the returns are likely to be much lower. It is difficult to determine how much investment business will remain in existence after the final calculation.
First, consider how big the bet is on AI. Data bricks Set out for lifting $3 billion to $4 billion in its latest round, but CEO Ali Ghodsi said investors offered $19 billion (he decided to roughly split the difference).
Given the massive level of demand, Databricks' recent valuation doesn't seem out of the ordinary. At $52 billion before adding new cash, the amount was up from $43 billion 15 months ago, and roughly 17 times the annual revenue run rate — not unusual for a company growing at 60 percent annually.
Private financing rounds of $1 billion or more were previously rare. It took the enormous ambition of SoftBank's Vision Fund and a handful of late-stage investment groups to break the mold. Now, investors like Thrive Capital, which led the Databricks round, are proud of their ability to raise $1 billion on their own.
Over the past two years, Elon Musk's AI model builders OpenAI, Anthropic, and XAI have raised nearly $40 billion between them. Other large investment rounds this week alone included $500 million To be confusedAnd an artificial intelligence search engine, and $333 million For Volterpart of a new group of companies that operates specialized cloud data centers to support artificial intelligence.
What makes this surge in private support for AI even more notable is that it comes against the backdrop of a broader collapse in venture investment. Compared to the boom year of 2021, before interest rates turned, the amount of venture capital invested two years later fell by 55 percent, to $161 billion, according to PitchBook. In the first nine months of this year, fewer than half the number of investors completed deals compared to all of 2021.
Fewer and larger funds are pouring ever-larger sums into an increasingly narrow range of companies, almost all in the AI space: it's a long way from the model on which the venture was founded, to spread small amounts of investment corn widely in the hope that a hit The occasional large one will make up for many errors.
But venture capital's concept of itself has changed. In many ways, private technology capital markets now rival Wall Street. Rates of return will necessarily decline as much larger amounts of capital are put to work in more mature companies, although successful investors will no doubt point out that they are able to achieve better returns than similarly sized funds investing in other asset classes.
For many other investors, the situation has become less than critical. After a brief boom in 2021, IPOs and sales to strategic buyers have declined. With less cash returned, many investors who back venture capital funds are unwilling to put up more. Many startups that achieved unicorn status during the boom would rather cut costs and conserve cash than come back to raise more money at a lower valuation. It will take some time for this to work through the system, but the reality – that many Zirp ratings are no longer supportable – will be inevitable.
Investors in the AI giant's latest round of funding are hoping to escape a similar fate. Companies like Databricks, which says it will turn positive cash flow this quarter, already look ready to go public. That could make 2025 a pivotal year for the latest venture capital investment fad.
richard.waters@ft.com
