Making sense of venture capital's AI paradox
Early-stage venture deals keep getting bigger, even once stripping out AI juggernauts. And that raises a multi-billion dollar question:
If AI is supposed to supercharge productivity, why are startups raising more money? Shouldn't they need less?
By the numbers: Median early-stage round sizes are up year-over-year for most industry sectors, easily outpacing inflation, according to Q1 data compiled by PitchBook and provided to Axios.
Not just in software, which includes many AI developers, but also in pharma/biotech (+29%), media (41%), IT hardware (71%), health-care systems (30.5%), and energy (79%).
For PitchBook, "early-stage" means the company must be less than five years old and, if a series is specified, it should be an A or B.
The best explanation for this disconnect may be that AI hype hasn't yet translated into a ton of actionable use cases.
The top ones so far are coding assistance and customer service automation, both of which can drive down startup costs but aren't necessarily game-changers.
This is far different than when cloud computing took hold, dramatically cutting startup costs for both equipment and real estate (and, arguably, leading to the NYC tech boom).
There also are some real-world cost increases, like Bay Area housing, but VC round sizes are climbing at a much faster clip.
The more cynical explanation may be that round size doesn't always match a startup's capital requirements.
Venture capitalists often have their own calculus, tied to fund dynamics and ownership stake thresholds. Or the desire to use money as a competitive moat, particularly if they view a startup as operating in a winner-take-all market.
Founders often lament taking more funding than they want, but either don't have better options or let future fundraising fears win out.
Sometimes both sides are aligned on the gluttony, since larger checks can correspond to larger valuations.
Finally, there's the academic explanation of Jevons paradox, formulated by a British economist 160 years ago, whereby increased efficiency can lead to increased consumption.
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