Not every startup is AI-related. Here’s an analysis of where venture capital funding is actually going

You’d be forgiven for assuming, based on business press coverage (cough), that, at any given point in time, there is a single, mega-disruptive technology that exerts a gravitational pull on any and all venture capital dollars. In the late 1990s and early 2000s, this would have been the internet and its nascent economy. In the late 2000s to 2010s, it was smartphone and SaaS apps. A few years ago, it was crypto, which, if the prognostications were correct, we would all currently be using to buy groceries.

Today, generative AI is the event horizon du jour. Its heralds, including founders and investors, promise a transformation of life and economics nothing short of total. Some of the largest generative AI startups have managed to close eye-watering funding rounds: Elon Musk’s xAI closed a $6 billion Series B in late May, nearly equal to the $7.6 billion Anthropic has raised in the past three years.

This fevered interest and the outsized investment into a small number of companies can give the impression that AI is the dominant, if not only, game to play in the startup space, with every VC frantically pivoting to bringing as many AI companies into their portfolios as possible.

But In reality, over the past two months, AI companies accounted for only about 20% of all startup funding rounds of Series B and earlier, according to a Fast Company analysis of Crunchbase data. The amount of venture capital they attracted was disproportionately higher (about 37% of the total), but that number drops back down to relative parity once we exclude xAI’s anomalously massive Series B round. After discounting that round, AI companies accounted for about 24% of all funding dollars.

With 20% of all Series B-or-earlier funding rounds, AI does represent the largest single category of business funded by VC dollars. The rest of the playing field that makes up the other 80% of startup space is fairly diverse—biotech, manufacturing, and software companies unrelated to AI, with none of those sectors making up more than 10% of the total rounds.

But if generative AI is the technological ne plus ultra, poised to revolutionize everything from medicine to beer, why isn’t it attracting the bulk of all venture dollars? Why not even above half?

The AI-skeptic answer—that the tech isn’t there and may never be, that generative AI is the new cryptocurrency, and so on—is, even if true, secondary to some basic realities of corporate finance. First and foremost, even if every VC wanted to pour their investors’ money into generative AI, venture funds are guided by their founding thesis statements, which determine the purpose and direction of where that money can be invested. While investment theses aren’t legally binding, an oncology fund wouldn’t suddenly pivot to an unrelated application of LLMs, even if the fund managers believe the LLM hype.

But even if they could, going all in on one technology violates the precepts of diversification 101. “If you go back to the late ’90s or early 2000s, the internet was one technology, and yes, it has changed a ton of things,” says Hady Farag, a member of the corporate finance, and strategy practice at Boston Consulting Group. “But you still had a ton of companies that originated in the software space in a similar time that have nothing to do with the internet that got a lot of the venture funding at the time.”

And ironically, some investors are likely spooked by the sheer amount of money being poured into generative AI technology by behemoths like Microsoft that make the prospect of betting on a huge winner less likely. “If I’m a VC and I see a large tech company spending billions or double-digit billions internally and on an advanced AI startup, I look very closely at, what’s the [path to success] for the startup opportunities we have?” he says. “Because the last thing we want is to invest in generative AI because it’s generative AI, and invest in the losers that are being blown out of the water by the winners.”

And then, yes, there’s the other possibility—that, like seasons and love, all things must end, and hype cycles are no different. “We’re in for one of the largest moments of cognitive dissonance in business or tech in my life,” says Ed Zitron, a tech critic who writes the Where’s Your Ed At Substack. “It’s been 18 months since ChatGPT reared its head and it’s not a dramatically different tool than it was then. There are multimodal features. It’s a little easier to use. But think about the jump between the first two years of the iPhone. It was a whole different level. The App Store changed how we use our phones forever. Two years in [with ChatGPT], we still don’t have a killer app.”

Regardless of the reason, the fact that VCs are more tepid about investing in generative AI startups than the zeitgeist might suggest is instructive for how we think of all technology—or any fad, for that matter. “The right thing to do here,” says Zitron, “is, at the very least, operate with much more suspicion.”