Median pre-money valuations of early-stage generative AI startups increased by 16% this year compared to 2022, per Pitchbook. The increase in valuations for generative AI startups is in stark contrast to the valuation slump experienced by startups across all other sectors. Valuations of startups in all other sectors raising Series A or Series B rounds dropped by nearly 24%.
Investors are primarily interested in companies in the generative AI field, not the whole AI sector. In Q1 2023, median pre-money valuations of generative AI startups doubled from 2022. On the other hand, valuations of growth-stage AI startups that were not involved in the generative AI field plunged in 2023, in line with all other sectors. Per CB Insights, despite the growth in generative AI deals, funding for the overall AI sector continued to slump in Q1 2023. Funding for global AI startups dropped 43% QoQ, whereas it dropped 27% QoQ for U.S.-based AI startups. Median late-stage deal sizes dropped to $25M in Q1, slumping below pre-pandemic levels. Index Ventures' partner Erin Price-Wright believes the current hype around generative AI startups is justified, as she believes that AI will be a core element of all software within the next 10 years. Per Pitchbook's report, the generative AI sector is poised to grow at a 32% CAGR to potentially become a $98.1B industry by 2026. Telstra Ventures' general partner Yash Patel estimates that generative AI startups in Series A stages are raising funds at a 5x revenue multiple over their annual recurring revenue (ARR). Most promising startups can raise funding at a 10x multiple. Felicis Ventures' general partner Sundeep Peechu believes that "general euphoria" about generative AI's potential is driving up the valuation of startups. As a result, Peechu says that some generative AI startups without any revenue can raise Series A rounds at valuations of above $250M. Rewind AI, a startup developing an AI-powered local search engine for Mac devices, secured funding at a $350M valuation led by NEA. The New York-based startup was only making a revenue of $700,000. Some investors were reportedly willing to give the startup a $1B valuation. Another AI startup, LangChain, raised funding at a $200M valuation led by Sequoia with "minimal" revenue. At the current valuations, Patel expects generative AI startups to demonstrate 300% yearly growth at the minimum. According to his estimates, a Series A startup with $1M in revenue deserves a pre-money valuation of $15M. Series A stage startups may struggle to raise subsequent rounds amidst the VC funding pullback as several startups will find it challenging to demonstrate revenue growth. However, generative AI startups may find it relatively easy to source funding, as they are being evaluated based on sheer potential rather than current revenue figures. |
