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Investors of all classes, including venture capitalists, are putting billions of dollars into artificial intelligence—but when it comes to VC funds, those investments aren’t translating to profits. Last year, U.S. venture firms returned the lowest amount of shares to investors since 2011, according to data from PitchBook. In fact, U.S. venture firms actually invested $60 billion more than they collected, the largest deficit in PitchBook’s 26 years of tracking investment data.
These low profits are likely to continue into 2024, even as venture firms show no signs of slowing down their hefty investments in AI. Global VC firms invested almost $89 billion in AI during the first three quarters of 2024 alone.
Why Venture Firm Profits Are Reaching Historic Lows
Previously, companies relied on private investors such as venture firms for initial funding rounds, then went public in order to raise more funds than they could in the private market. An initial public offering (IPO) was also the only way for employees to cash out shares and make a profit. These successful IPOs created huge profits for venture firms and other initial investors.
However, in past years, venture firms’ funds have grown to the point that they can keep funding companies indefinitely, eliminating the need for an IPO. Venture firms have also begun buying out employee shares through tender offers. This means fewer companies going public—both in artificial intelligence and other areas of tech—and therefore smaller profits for the venture firms that back them.
Acquisitions have also almost stopped completely due to regulatory blocks, reducing another main source of venture firm profits. As reported in the Wall Street Journal, some venture capitalists hope that the incoming Trump administration will ease up on regulations, which could prompt more acquisitions and sales. Much of the AI boom is also being driven by large tech companies that are already public, such as Microsoft, Google and Amazon. These huge organizations are decades old and far past the raising capital stage, so venture firms can’t invest at the ground level like they normally would.
Venture Firms Keep Investing in AI
Despite this historic drop in profits, venture capital firms have continued to invest significant funds into AI companies. In fact, AI investments represent one-third of all funding given out by U.S. venture firms in the first nine months of 2024.
AI venture capital deals are also some of the largest, with four out of the 10 biggest investments in Q3 going to artificial intelligence companies. Most of this money is going toward industry fundamentals, mostly developing and training AI models. Right now, venture capitalists show no signs of slowing down AI investments as we wrap up 2024 and head into the new year.
Read our guide to how to invest in artificial intelligence to learn more about the risks and reward of putting your money into this sector.
