Venture Capital Firms Slash ‘Megafunds’ Even Amid AI Boom

Venture capital (VC) outfits are reportedly shrinking their megafunds after years of building them up.

As The Wall Street Journal (WSJ) reported Sunday (July 16), these cuts illustrate the way tech investors are scaling back their goals even as tech stocks rebound in part because of the recent artificial intelligence (AI) boom.

According to the report, venture investors say many opportunities in the AI sector are centered around small startups, with few opportunities involving later-stage companies. And recent initial public offerings (IPOs) also show the market for new issues is still recovering, the WSJ said.

“When money got a little easier, did the marginal investments sneak in? Yes. And that’s why we’re all sort of taking pause and getting back to basics,” Alfred Lin, a partner at Sequoia Capital, told the WSJ. 

Last month, his firm downsized its own business by separating its U.S. and European operations from those in India and China in response to U.S. government scrutiny of its China ventures.

Against this backdrop, cash-hungry tech startups have increasingly begun looking among larger companies for buyers, PYMNTS wrote last week. 

For example, Databricks recently announced a $1.3 billion mostly stock deal to purchase AI start-up MosaicML, while Typeface was valued at $1 billion following an oversubscribed funding round headed by Salesforce’s investment arm.

This year has also seen Thomson Reuters pay $650 million to acquire legal services AI group Casetext, Robinhood purchase credit card startup X1 for $95 million, and finance automation company Ramp buy Cohere.io, a startup that creates an AI-powered customer support tool.

The flurry of takeovers has been boosted by an estimated 1,000 tech startups valued at more than $1 billion that are now “stuck without a clear path to liquidity,” Ryan Nolan, Goldman Sachs global co-head of software investment banking, said in a Financial Times interview.

“There is a wave of consolidation coming in tech and particularly software,” he said.

Previous reporting by PYMNTS found that early-stage tech startups in the U.S. have seen a significant drop in VC spending.

In the second quarter of 2023, American investors backed 3,011 startup deals, which is a third lower than the same period last year 2022. VC firms also spent less, with the total amount just south of $40 billion, almost half of what these investors spent last year. The biggest drop in funding happened in angel or seed deals for startups in the concept phase.