Venture Capital Struggles Amid IPO Drought as AI Startups Dominate Investor Attention

IPO Market Struggles as Investors Flock to AI | PYMNTS.com

Venture capital firms are reportedly struggling amid a lack of mergers, acquisitions and public listings. It's a situation that has led to a liquidity drought as artificial intelligence (AI) startups draw investor attention, CNBC reported Thursday (Nov. 14). "In the U.S., when you talk about the presidential election, it's the economy stupid. And in the VC world, it's really all about liquidity stupid," Edith Yeung, general partner at Race Capital, a Silicon Valley early-stage venture capital (VC) firm, said at CNBC-hosted the Web Summit tech conference in Lisbon. Yeung said the lack of initial public offerings (IPOs) in the past few years had fostered a "really tough" environment for the VC world. Meanwhile, investors are clamoring to back AI companies. "What's really crazy is in the last few years, OpenAI's domination has really been determined by Big Techs, the Microsofts of the world," Yeung said. Larry Aschebrook, founder and managing partner at late-stage VC firm G Squared, agreed that the search for liquidity is getting harder -- even though companies such as OpenAI are enjoying massive funding rounds, which he called "a bit nuts." "You have funds and founders and employees searching for liquidity because the IPO market is not happening," Aschebrooke said. "And then you have funding rounds taking place for generational types of businesses." As PYMNTS wrote last year, AI companies raised $11.8 billion during the third quarter of this year, accounting for approximately 30% of total VC investments worldwide. "The AI sector remains a long-term growth opportunity for VC investors despite the volatility seen in recent months," Stocklytics wrote. "Although they are being more selective about which AI startups to back, the overall interest remains strong, and Crunchbase data proves this." Although this figure marks a slight drop from prior quarters, Stocklytics reports it represents the sixth-largest quarterly funding total in the sector's history. The number of deals decreased 28% year-over-year to 79, but more substantial investments, such as a $1 billion round for Safe Superintelligence, have helped to lift overall funding levels. AI startups had -- as of that writing -- raised a record $53 billion for the year, exceeding the $49.4 billion raised in the entirety of 2021. This brings funding in the AI sector to over $241 billion, with U.S. companies, especially those in California, securing nearly 65% of the total.

It's 'liquidity, stupid': VCs say tech investing is tough amid IPO lull and 'nuts' AI hype

LISBON, Portugal -- It's a tough time for the venture capital industry right now as a dearth of blockbuster initial public offerings and M&A activity has sucked liquidity from the market, while buzzy artificial intelligence startups dominate attention. At the Web Summit tech conference in Lisbon, two venture investors -- whose portfolios include the likes of multibillion-dollar AI startups Databricks Anthropic and Groq -- said things have become much more difficult as they're unable to cash out of some of their long-term bets. "In the U.S., when you talk about the presidential election, it's the economy stupid. And in the VC world, it's really all about liquidity stupid," Edith Yeung, general partner at Race Capital, an early-stage VC firm based in Silicon Valley, said in a CNBC-moderated panel earlier this week. Liquidity is the holy grail for VCs, startup founders and early employees as it gives them a chance to realize gains -- or, if things turn south, losses -- on their investments. When a VC makes an equity investment and the value of their stake increases, it's only a gain on paper. But when a startup IPOs or sells to another company, their equity stake gets converted into hard cash -- enabling them to make new investments. Yeung said the lack of IPOs over the last couple of years had created a "really tough" environment for venture capital. At the same, however, there's been a rush from investors to get into buzzy AI firms. "What's really crazy is in the last few years, OpenAI's domination has really been determined by Big Techs, the Microsofts of the world," said Yeung, referring to ChatGPT-creator OpenAI's seismic $157 billion valuation. OpenAI is backed by Microsoft, which has made a multibillion-dollar investment in the firm.