Investors still have an AI FOMO problem: 57.9% of global VC dollars invested in Q1 went to AI and machine learning startups, according to the latest PitchBook-NVCA Venture Monitor.
“The fear of somebody else winning your market has never been higher than it is now,” said Maria Palma, general partner at Freestyle Capital. “You haven’t seen a slowdown because the rate of change on the technology side is almost indigestible.”
The capital is even more concentrated in North America, with 70.2% of deal value going into AI and ML startups. Globally, the sector raised $73.1 billion in the first quarter—more than half of last year’s annual total. Of that, $40 billion came from OpenAI’s recent round led by SoftBank.
The piling of VC into AI companies also means that the investment outcomes will be very uneven.
“You’re seeing a lot of extremes happening, and that’s going to mean there’s going to be a lot of losers,” said Nnamdi Okike, co-founder and managing partner at 645 Ventures. “A lot of VC funds are just kind of saying, ‘Hey, this can only go up.’ And that’s usually a recipe for failure—when that starts to happen, you’re becoming detached from reality.”
His biggest concern is investors betting big in areas where there’s no clear pathway to ROI. The massive amounts of funding can distract startups away from building a sustainable business sooner rather than later.
“When a new market comes along, VCs kind of lose their head a bit, and just flood in without really understanding the underlying economics of a category,” he said. “The jury is out on the economics of a lot of them.”
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