AI-Related Seed Rounds Slow, But Prices Remain High

The third quarter was the second-largest for venture funding to AI startups ever — with a whopping $19.1 billion raised, per Crunchbase.

However, the numbers also showed total deal flow in Q3 dipped to under 1,000 rounds for the first time since ChatGPT launched — falling 33% from last year.

At the heart of that deal flow decline was the very earliest stage — seed — which saw a precipitous 43% drop from just a year ago. However, valuations for those early seed rounds seem to have never been higher.

The numbers

Last quarter, there were only 627 seed rounds — defined as angel, pre-seed and seed here for our purposes for AI-related companies — compared to a massive 1,095 in Q3 last year, Crunchbase data shows.

The number represents a 43% drop in seed rounds from Q3 last year and marks the first time the number of seed rounds for AI-related startups has dropped below 800 since the launch of OpenAI’s ChatGPT.

Still sprouting money

It would be logical to think such a decline in seed volume would have an effect on total venture dollars to AI startups at that funding stage — but that would be wrong.

In fact, the small number of AI-related seed rounds in Q3 raised basically the same amount of total cash as the more than 1,000 did in the same quarter last year, a review of Crunchbase data shows.

While Q2 did see about 35% more dollars raised in seed rounds, Q3’s dollar figure for seeds pretty much tracked with the past several quarters.

The most obvious reason is that valuations for seed rounds are at their height — at least so far.

AI-related startups do raise some large seed rounds — such as San Francisco-based Sentient’s $85 million seed or Mclean, Virginia-based Defcon AI’s $44 million one — usually because the young startups in AI already demand a high valuation and thus a bigger dollar amount must be invested to get a legitimate stake.

While it’s hard to give a median valuation price for seed rounds — few startups announce a valuation that early — the drastic drop in deal volume at that funding stage, coupled with the unchanged total dollar amount, leaves little doubt that average valuations have likely increased.

Little changes upstream

Early-stage and late-stage/technology growth rounds for AI startups saw little significant change in their Q2 numbers.

Early-stage funding saw a slight 6% drop from Q3 last year and a 12% decline from Q2. Venture dollars were significantly down in Q3 compared to Q2 — but that is completely attributable to Elon Musk’s generative AI startup, xAI, which officially announced its long-rumored $6 billion Series B round at a $24 billion valuation in Q2.

The $6.2 billion raised in Q3 in early-stage rounds actually was a 41% increase from Q3 2023.

Similarly, late-stage rounds were relatively unchanged as far as deal volume went. Late-stage venture dollars for AI startups hit $11.3 billion in Q3 — 36% more than Q2 and 30% higher than the same quarter last year.

The late-stage dollar amount was likely helped out by Alphabet’s $5 billion investment into autonomous vehicle tech developer Waymo.

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Illustration: Dom Guzman