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November 19, 2023 | Tom Ballard

Venture Capitalist sees a tale of two types of start-ups

Those in the artificial intelligence sector continue to do well, while those in mid- to later stages will continue to experience challenges in 2024.

Don Butler, Managing Director at Thomvest Ventures, writes in this recent Crunchbase News article that 2023 “has turned out to be quite positive for venture funds that have dry powder left after pacing themselves during the venture bubble of 2020-2021.”

Noting that Crunchbase data show a “dramatic increase” in the number of early stage start-ups seeking funding and a return to the well for mid- to late stage companies, Butler says that this “has presented a deal-flow challenge for many venture funds this year — our firm is running at more than twice our normal volume of quarterly prospects. At the same time, the market has bifurcated into two very different types of deal dynamics based on company stage and market sector.”

Not surprising, he notes that Thomvest Ventures evaluated more companies seeking financing in the generate artificial intelligence (AI) sector than ever before in the fund’s history. “In contrast to the optimism surrounding new AI-driven companies at the seed and Series A levels, most later stage companies are navigating a post-bubble investment round dynamic. The majority of later stage companies, however, are in a post-bubble reset mode where they have to demonstrate a combination of capital efficiency, growth, and a willingness to reset valuation expectations in order to make a financing round come together.”

What about 2024? Butler says that he expects deal-flow volumes for AI start-up at the earlier stages to return to a more normal level. That will be coupled with a less rosy outlook for those in the mid- to later stages. “we expect to see a continued reckoning in 2024 as they find their cash balances dropping and are forced into either a financing, sale, or wind-down of the business.”

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