Summary:
Early-stage venture deals are increasing in size despite AI's promise of efficiency.
Median round sizes are up across multiple sectors, significantly outpacing inflation.
AI hype has not yet resulted in many actionable use cases, limiting its impact on startup funding needs.
Real-world costs like housing are rising, but VC funding sizes are climbing faster.
The Jevons Paradox suggests that increased efficiency can lead to increased consumption, applicable to AI.
The AI Paradox in Venture Capital
If AI is meant to boost productivity, why are startups securing larger funding rounds? This intriguing question arises as early-stage venture deals continue to grow, even when removing the influence of AI giants.
By the Numbers
According to PitchBook data, median early-stage round sizes are increasing across various sectors, well above inflation rates:
- Pharma/Biotech: +29%
- Media: +41%
- IT Hardware: +71%
- Health-Care Systems: +30.5%
- Energy: +79%
For PitchBook, the term "early-stage" refers to companies under five years old, typically categorized as Series A or B.
The Best Explanation
The disconnect may stem from the fact that AI hype has not yet translated into many actionable use cases. The primary applications so far—coding assistance and customer service automation—can reduce startup costs but aren't necessarily transformative.
This scenario contrasts sharply with the advent of cloud computing, which significantly lowered startup costs for equipment and real estate, contributing to the NYC tech boom.
Real-World Cost Increases
While costs are rising in areas like Bay Area housing, the growth rate of VC round sizes is significantly outpacing these increases.
A Cynical Perspective
Sometimes, the size of funding rounds does not reflect a startup's actual capital needs. Venture capitalists often have their own calculations based on fund dynamics and ownership stakes. They may opt to invest larger amounts to create competitive advantages, particularly in winner-take-all markets.
Founders might find themselves accepting more funding than desired due to lack of better options or fears of future fundraising challenges. This can align both parties in a cycle of gluttony, as larger checks often lead to higher valuations.
The Academic Explanation
The Jevons Paradox, articulated by a British economist over 160 years ago, suggests that increased efficiency can lead to increased consumption. This theory, traditionally discussed in the contexts of energy and agriculture, may soon apply to AI as well.
The Bottom Line
Venture capital frequently discusses the AI revolution, yet it appears to be investing more money than the actual results warrant.
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