Where to, Shark Tank? AI funding boom leaves non-AI startups on the outside looking in

AI-focused venture funding is creating a stark divide in the startup landscape, with intelligent software companies commandeering nearly half of all enterprise investments while non-AI startups struggle to attract capital. This growing concentration of resources threatens to create a barren “no man’s land” for companies outside the AI boom, potentially leaving many promising ventures without the necessary funding to survive in an already challenging exit environment.

The big picture: AI-focused funds now dominate venture capital, capturing 40% of all U.S. venture capital raised last year, quadrupling from just 10% in 2021, according to Silicon Valley Bank’s latest “State of enterprise software” report.

Behind the numbers: AI companies received 45% of all U.S. venture investment in enterprise software, a dramatic increase from just 9% in 2022.

• Megadeals over $100 million for AI companies like OpenAI and Anthropic represent about half of all money raised in the overall megadeal category.
• Non-AI companies have seen essentially flat investment over the past year, showing no meaningful growth.

Why this matters: The concentration of capital in resource-intensive AI companies is creating a difficult environment for startups in other sectors, leaving many stranded without adequate funding.

• Many non-AI startups “run the risk of ending up in no man’s land,” according to SVB, with an increasing number becoming “Zombiecorns” – companies with poor revenue growth and unit economics.

The exit challenge: The broader market continues to struggle with limited exit opportunities, a problem that’s persisted since inflation spikes in late 2021 triggered interest rate increases and risk aversion.

• Despite hopes that Trump’s return to the White House would revitalize the startup economy through lower taxes and reduced regulation, aggressive tariff policies announced in April caused several companies to delay planned IPOs.
• While CoreWeave’s IPO was a success story for venture investors, few other pure-play AI investments have proven lucrative so far.

The capital dilemma: Major AI companies require billions in ongoing investment for infrastructure and computing costs, while showing little indication of near-term public offerings.

• High-valued AI startups like OpenAI, Anthropic, Perplexity, and Scale AI have shown no signs of imminent IPOs.
• These companies are too expensive for most potential acquirers and require continuous massive investment to fund infrastructure and AI workload costs.