NEW YORK: US venture capital (VC) funding surged to US$55.6bil in the second quarter, marking the highest quarterly total in two years, according to PitchBook data.

The latest figure shows a 47% jump from the US$37.8bil US startups raised in the first quarter, largely driven by significant investments in artificial-intelligence (AI) companies, including US$6bil raised by Elon Musk’s xAI and US$1.1bil raised by CoreWeave.

The ongoing excitement around building AI technology since the launch of OpenAI’s ChatGPT chatbot has fuelled the recovery of VC funding as investors place substantial bets on startups. The hope is that revenue from AI adoption will yield significant returns.

“Investors assign a premium to everything AI - the capital intensity of most AI businesses requires outsized funding,” said Casber Wang, partner at Sapphire Ventures.

“As we discover stronger commercial use cases for AI, more AI companies are showing real revenue.”

After reaching a record high US$97.5bil in the fourth quarter of 2021, US VC funding had been steadily declining. It hit a recent low of US$35.4bil in the second quarter of 2023, amid a high interest-rate environment and a sluggish exit market.

The recent influx of capital into AI startups has reversed the downward trend, as investors double down on AI foundation model companies as well as applications from code generation to productivity tools.

Despite the increase in deal activity, exits remain challenging, the data shows, as small deals generated about US$23.6bil in exit value in the second quarter this year, down from US$37.8bil in the first quarter.

The initial public offering market has struggled to gain momentum, even after companies, such as cloud data management firm Rubrik, went public.

Emerging VC fund managers may have already felt the pressure of a lack of proven returns, with only US$37.4bil in commitments raised through the first half of the year.

 - Reuters