AI startups are eating up the venture industry, and the returns, so far, are good

Well, the data is out. All included start-ups are counted for 41% of the $128 billion in venture dollars raised by companies on Carta last year — a record annual share. In a sense, though, we knew that. Investors last year were voracious in raising capital in AI startups, to such an extent that 10% of the startups represented for half the funding.

These startups included Anthropic, OpenAI, and xAI, which raised double-digit billions last year at lofty valuations. In fact, they are still rising at an even more astonishing rate. In January, xAI raised a $20 billion series.

In terms of size, between OpenAI and xAI was Anthropic, which raised a $30 billion series last month at a $380 billion valuation. OpenAI and Anthropic accounted for a large portion of the $189 billion in global venture capital raised last month and, along with xAI, have teased IPOs for later this year that have left investors frothing at the mouth.

The state of the venture market is now K-shaped — or bifurcated — in which capital remains concentrated in a select few companies that then back a handful of companies, while everyone else is kind of there.

“While funding rounds have become slightly more difficult to raise, the capital for each round has increased,” Peter Walker, chief information officer at Carta, told TechCrunch. “So less bets, but more capital. AI startups are doing bigger rounds not because they have a lot of employees — they don’t — but because the cost of running AI models is high.”

Carta’s latest data also shows that funds raised in 2023 and 2024 (after the launch of ChatGPT in late 2022) recorded the highest internal rate of return (IRR), compared to the reduced IRR of funds raised between 2017 and 2020. The report considers the increase in IRR of funds raised as a positive starting indicator for some years emerging from this AI moment.

“It’s promising that newer funds have seen the IRR start strong,” Walker said, adding, however, that there are some factors to consider. First, he said, newer funds may appear to be doing well on paper because if they invested in a seed round, for example, and that company went on to raise a Series A at a higher valuation, then on paper it looks like the investor got high returns in a short period of time.

“That pushes the IRR up,” Walker said. “It is also possible that the portfolios of more recent vintage funds are full of native startups in a way that the portfolios of 2021/2020 funds are not.”

Time will tell if this early excitement translates into real returns for investors through outings like brainstorming IPOs or big-dollar buyouts, or if we’re just in the publicity phase of a bubble that will eventually burst.