Venture Capitalists Double Down on A.I. Investments Despite Cooling Markets
Despite warnings of a potential bubble from A.I. leaders like Sam Altman, venture capitalists are doubling down on A.I.-related investments, albeit in a more deliberate and strategic way. According to Gené Teare, senior data editor at Crunchbase, “Every investor I speak to says 90 percent of new investments are in an A.I.-related field.” This trend is driven by the belief that A.I. will be the center of the next wave of innovation, with investors looking to invest in companies that will be part of this wave.
Teare notes that current investor buzz is centered on coding and customer service startups with A.I. foundations. Investors are also focused on investing in companies at the seed or series A level, which are expected to become the emerging or largest companies in the next 5 to 10 years. According to Crunchbase, tomorrow’s most promising companies will likely be in A.I. infrastructure and cybersecurity. The data from Crunchbase also shows that venture funding may be down from its 2021 peak of $702 billion, but it still reached over $350 billion in 2024, with investors remaining active and selective in their investments.
A.I. is Changing How VCs Invest
A.I.’s rapid evolution is not only changing which companies VCs invest in, but also how they invest. Michael Stewart, managing partner at M12, Microsoft’s venture capital fund, told Observer that “We are experimenting with how A.I. can help analyze leads.” M12’s portfolio includes companies like Livongo by Teledoc Health, HR software Beamery, and retail advertising platform GroundTruth. While M12 still sources deals the traditional way, through meetings and networking, the team now uses A.I. to analyze those leads, looking at unit economics, pricing strategies, and underlying technology.
Stewart didn’t specify which tools they use, but said M12 has shifted from outside customer relationship management systems to Microsoft’s own technology. Dealmaking platforms like Affinity and Carta also integrate A.I. into their offerings. Last year, Anthropic partnered with Menlo Ventures to launch the Anthology Fund, which uses Claude to recommend startups for investment. Despite all the changes, some venture capital fundamentals remain, such as customer acquisition cost and lifetime value being pivotal metrics, and founder quality mattering more than ever, according to Teare.
While some startup founders are opting to bootstrap, Stewart noted that’s rarely an option in A.I. due to the steep costs of hiring top talent, securing GPUs, and scaling infrastructure. Most cutting-edge A.I. ventures require outside funding, despite the technology’s potential to reduce operating expenses. This competitive environment pushes Stewart to ask founders tough questions, such as “How are you showing that you’re changing customers’ behaviors? How are you getting them to bring in A.I. at a deeper level of their own company strategy?” Proving real recurring revenue beyond pilot projects is a key differentiator, according to Stewart.
Like many A.I. investors, M12 is also eyeing infrastructure, with Stewart noting that “We’re in this energy-constrained world where we want to scale solutions at a global level.” If unaddressed, these challenges become destiny-limiting, so it’s essential to focus on chips, networking, memory, and the kinds of endpoints where you deliver A.I. However, challenges lie ahead, with funding rounds getting bigger at earlier stages, creating pressure for those investments to mature. As Stewart noted, “Mathematically, it is possible to go even larger, but you’re going to need to let those bets we in the VC industry just made mature into those leaders.”
Image Source: observer.com
