AI Funding Surges, But Is It Sustainable?

In 2024, one-third of global venture capital investments were directed toward artificial intelligence startups, showcasing the sector’s increasing prominence. However, according to Jacob Robbins in PitchBook, while AI and machine learning (ML) startups accounted for 35.7% of VC global deal value and $131.5 billion in funding, venture capitalists’ concerns about the sustainability and focus of investments in AI funding are growing.

The surge in AI funding is driven by major tech firms. North America, in particular, allocated nearly half of its VC funds to AI. Yet, some investors argue this trend reflects inefficiencies in capital allocation.

Robbins says early-stage AI valuations have reached unsustainable levels reminiscent of previous low-interest-rate eras. Additionally, investments have disproportionately concentrated on foundational models and infrastructure layers, such as OpenAI, xAI, and Anthropic, which saw funding grow by over 100% in 2024.

Critics contend that this heavy focus neglects AI’s application layer, where long-term returns will likely materialize. With nearly a quarter of new startups identified as AI companies, investors face increasing difficulty identifying truly innovative and profitable ventures.

Despite this, some argue the effort to sift through the abundance of startups is worth it, as the potential rewards have grown alongside the risks.

“It’s not a question of too much capital, but rather the inefficient allocation of that capital,” said Samir Kumar, co-founder and general partner at Touring Capital.

For legal professionals advising VC firms, understanding the shifting dynamics of AI funding is critical. Firms should help clients scrutinize investments, especially in overfunded areas. Additionally, legal teams can play a role in evaluating a startup’s intellectual property and bias risks and ensuring compliance amidst rapid market growth.