The State of AI Investing on AngelList

Breakthroughs in large language models (LLMs) appear to have fueled an AI investment frenzy these past six months. According to data provided by Harmonic, nearly 1k new AI startups have launched since OpenAI’s release of ChatGPT in November 2022.

On AngelList, 42% of all investments in the AI sector have occurred within the last year. Additionally, 35% of all capital deployed into the AI sector on AngelList has been deployed in the last year.

In this report, we investigate how AI investment activity on AngelList has expanded over the past year, and how it’s impacting the broader startup landscape.

Investment Volume

In the past year, AI startup rounds climbed from 4% to 13% of dealshare on the AngelList platform, representing a roughly 200% overall increase in AI deal share. This makes AI the most popular investment sector currently on AngelList. In 2022, AngelList saw a year-over-year increase in AI startup investments of 20%. This year, AngelList has seen heightened AI investment activity, with investments in unique AI startups currently at 72% of 2022 volume and on track to grow 84% year-over-year.

While this growth is impressive, it’s worth noting that growth in unique AI startup investments on AngelList was stronger in 2020 and 2021. This is partially because the volume of investment activity in 2021 was less than half of what it's projected to be in 2023, making the increase in growth seem outsized. Given this variance in investment activity, it may be misleading to suggest that AI was “hotter” in 2020 and 2021 than it is today. By absolute numbers, more unique AI startups have received funding in the past year than any previous observed time in our dataset.

It’s also worth acknowledging that AI’s growth in 2020-2021 came during one of the greatest bull markets ever for technology startups. The venture market is currently down an estimated 80% over the past year in terms of capital raised, meaning AI’s current growth comes despite a major market contraction. In other words, AI is growing in an environment where virtually no other sectors are.

Because many AI startups have launched these past 6 months, early-stage investment (pre-seed to Series A) in AI is showing especially strong performance in 2023. Pre-seed startup rounds grew 138% year-over-year in 2022 and are on track to grow 182% year-over-year in 2023. While 2022 seed round growth came in at 5%, 2023 is on pace for 120% year-over-year growth. Similarly, Series A is on track to grow 29% in 2023 after growing 5% in 2022.

Meanwhile, later-stage AI deals comprise 10% of all later-stage deal activity on AngelList. We should expect this number to grow over time as more of the AI startups launched in the past year mature and raise additional rounds of funding.

Another telling metric is demand for AI secondaries. While secondary rounds make up a significantly smaller portion of investment deals on AngelList, AI secondary rounds have grown from 3% of all secondaries at the start of 2021 to 19% at the end of 1Q23.

Funding Volume

13% of all capital deployed on AngelList is currently deployed into AI startups, up from 5% in 4Q22. This means AI is currently receiving the largest share of capital deployed on AngelList of any sector. In 2023, AI pre-seed and seed funding is on pace to grow 212% and 147% year-over-year, respectively.

Overall, we project capital deployed into AI startups will grow 13% YoY. This growth is attributable to increased funding to early-stage AI startups (pre-seed to Series A).

Meanwhile, later-stage funding is expected to contract by more than 60% in 2023. The decimation of later-stage AI funding is why growth in actual capital deployed is projected to be relatively modest, especially when compared to 2021. Less capital is flowing into VC in 2023, given the market downturn. And of the capital that is deployed, much of it is earmarked for early-stage AI startups, which are proving to be less capital-intensive investments. This unique combination of factors has resulted in seemingly underwhelming growth projections, despite widespread enthusiasm amongst investors for AI technology.

Investment Performance

While it’s too early to determine how well the most recent cohort of AI startups have performed, AI startups on AngelList dating back to 2017 have proven, on aggregate, to generate positive returns for investors. For the 2017 vintage, AI investments are currently seeing a multiple on invested capital (MOIC) of 7.2x. Additionally, 88% of AI investments from the 2017 vintage have seen an increase in valuation. The later vintages feature progressively lower MOICs, which makes sense given these investments haven’t had as much time to season (e.g., go through subsequent rounds of funding).

Similar to most sectors in tech, later-stage valuations for AI startups have cratered from the halcyon days of 2021. Much of the negative growth we’re seeing in capital deployed into AI is likely attributable to the pullback of later-stage funding rounds. Series B post-money valuations declined from $520M in 1Q22 to just $70M at the end of 4Q22, before rebounding in 1Q23. Similarly, Series A funding declined from $80M in 1Q22 to $36M in 4Q22, before bouncing back to $61M in 1Q23.

Meanwhile, valuations have held relatively steady for pre-seed and seed rounds at $10M and $20M respectively. These rounds did not see the same bubble activity as later-stage rounds in 2022.

Analysis

Overall, AI investment on AngelList is booming. That being said, growth in AI investment isn’t as strong as it was in 2020-2021 due to a combination of factors:

• The AI market on AngelList was smaller in 2020 and 2021, making expansion in growth during that time period appear outsized.
• The depressed fundraising market is stifling the amount of capital deployed into startups, particularly later-stage startups.
• Much of the investment activity in AI on AngelList is currently focused around early-stage startups, meaning the investment amounts are relatively small.
• AI investments appear to be generally less capital intensive than other forms of tech, given many AI tools are built on top of existing open source platforms.

The volume of current investment into AI indicates we’ll eventually see increased growth in capital deployed and valuations as many of the startups launched in the past year mature and raise later-stage funding (similar to what we're seeing with Web3 now). Perhaps at some point, AI might even chart a path out of the current venture market malaise. For the time being, the AI venture market has re-entered a grassroots phase, with many entrepreneurs tinkering with LLMs in an attempt to find broad use cases for the emergent technology.

Are you ready to start investing in early-stage AI startups? Numerous AngelList fund managers are active in the AI sector. To start investing with leading AI VCs, visit our website.

For more data on early-stage VC, check out our Real-Time Startup Valuation Dashboard or read our latest quarterly State of Venture report.