VC Activity in AI and Machine Learning Declines Significantly in Q2: Report

Venture capital (VC) funding slid more deeply in AI & ML than in software overall in Q2, “falling 27.8% quarter-over-quarter (QoQ) compared to 21.6% for IT more generally.” according to an update from Pitchbook.

Both deal value and deal count “fell to their lowest levels since Q4 2020, also lagging the rest of IT,” the report from Pitchbook revealed. Of the 70 product categories the firm tracks, “only 21 are on pace to grow in VC funding in 2022, driven by leading vertical applications including sales & marketing, information security, and drug discovery.”

The update from Pitchbook also mentioned that horizontal platform investment “is lagging, as outsized revenue projections face market realities, with AI-as-a service (AIaaS) investment on pace to decrease 87.7% in 2022.”

Numerous AI platform companies “have struggled to reach revenue forecasts in the current financial environment, creating a greater emphasis on vertical applications that can rapidly deliver value.”

The Pitchbook report pointed out that high-growth use cases “include accounting automation, wealth management, metaverse, and quantum AI.” Use cases that both address long-term opportunities and near-term financial pressures “are outperforming.” VC exits “continued their Q1 slowdown, maintaining flat deal value at $14.7 billion yet falling 21.8% in deal count to 100 exits.” SPAC mergers continued “to close in Q2 with Pagaya, Eve, and SoundHound completing exits valuing the companies at multi-billion-dollar valuations.”

Several acquisitions announced early in the market downturn “closed during Q2, including Snowflake’s $800.0 million acquisition of Streamlit and Software AG’s $584.0 million acquisition of Streamsets.”

The closing of mega-exits “demonstrates the sustained value of advanced data analytics software to database management incumbents even during economic volatility.”

The report added that AI leaders “remained minimally active in M&A with IBM acquiring database management startup Databand for $150.0 million and Meta acquiring clothing size recommendation startup Presize.AI.”

As covered recently, the Emerging Tech Indicator (ETI), released by Pitchbook, provides a quarterly review of seed- and early-stage investment activity “involving a limited subset of the world’s most successful venture capital (VC) firms.”

The analysis provides “a unique perspective into the types of technologies top investors view as the most promising, while also tracking how aggressively they are making capital allocation decisions.”

In the second quarter of 2022, Pitchbook reportedly “tracked 195 early- and seed-stage deals that involved the top 15 VC firms (relative to 5,941 total early- and seed-stage VC deals).” These firms are “determined each quarter based on the success of their investments over time in terms of exits and valuations.” As noted in the update, ETI startups identified via their top 15 methodologies have strongly outperformed “the broader VC industry, exhibiting higher exit rates and higher valuations.”

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