Artificial intelligence has become more than just a buzzword. Widespread conviction that AI is the next technology revolution has caused a frenzy among investors of all stripes from corporates to venture capitalists (VC).

Preliminary data from PitchBook for the fourth quarter of 2024 shows that, in value terms, 50.8% of global VC funding was deployed in AI-focused companies, almost double its share from the same quarter of 2023. By number of deals, VC investment into AI-focused companies fell by 16.6% over the same period, but due to a declining number of total VC investments, AI’s share of deals still rose from 21.4% to 25.9%.

Mega deals worth more than $1bn are the main driver behind this trend. But even when they are excluded, AI-focused firms still captured a greater share of VC investment value in 2024 than in previous years. Global VC funding for AI start-ups rose to $131.5bn in 2024 — up by 52% from a year earlier, compared to a decline of about 10% to $237bn for other start-ups, according to preliminary data from PitchBook.

The concentration of investment into AI is a reflection of the herd mentality typical of the VC industry, according to Bill Janeway, an economist, venture capitalist and author of Doing Capitalism in the Innovation Economy.

“This is what we see again and again, whenever any of these new technological innovations have a broad range of potential applications. But nobody knows yet [which] will prove to be sustainable on a longer basis,” he says, in reference to multiple VC bets being placed on different AI companies.

Prominent AI model providers secured some of the largest funding rounds in 2024, including the Silicon Valley-based start-up Anthropic, Toronto-based Cohere and the Paris-based generative AI start-up Mistral. OpenAI, the firm behind the now ubiquitous ChatGPT, raised $6.6bn last October at a valuation of $157bn. 

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Rivalry between two of the estranged OpenAI co-founders, Sam Altman and Elon Musk, is another major development. xAI, Musk’s maker of large language models that has set its sights on competing with OpenAI, is already reported to be worth $50bn, after its $6bn round in December.

Databricks, which helps businesses store, process and analyse large quantities of data, raised the largest global round of 2024 at $10bn. The Silicon Valley scale-up, which is now valued at $62bn, has grown rapidly due to the AI “awareness revolution” that has permeated across industries.

Kyle Stanford, lead VC analyst at PitchBook, says that many of the largest funding rounds for AI companies are not “a typical VC deal” since they are financed by large corporates, including Amazon, Microsoft and Google, rather than from dedicated VC funds. Semiconductor leader Nvidia increased its investments in AI to $1bn across 50 start-up funding rounds in 2024, according to Dealroom.

“AI is not just a single technology, and it makes available a multitude of business models and use cases,” said Mr Stanford. “This is not a singular technology that is receiving such a large proportion of venture dollars globally.” The large size of AI deals implies a longer-term development and implementation process than more traditional types of VC deals into fintech and software start-ups, he added.

PitchBook data shows that the greatest regional concentration of VC funding for AI in 2024 was found in North America, where almost a third of deals and 60% of VC investment value were for AI start-ups. Europe had the next greatest concentration with about a quarter of VC funding rounds made for start-ups in AI. 

The huge funding rounds and valuations for AI start-ups reflects how costly it is to build the infrastructure and collect the data needed to train models. But despite the hope that AI start-ups could bring huge productivity benefits and disrupt industries, debate continues over the companies that will win out. “The long-term viability of AI investments hinges on responsible deployment, robust ethical frameworks, and solving real challenges like energy use and bias,” says Agate Freimane, general partner at Norrsken VC, a Stockholm-based impact VC fund.

AI stands out in an otherwise subdued VC landscape with low exit activity, but which start-ups will emerge as long-term success stories remains an open question.

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