With A.I. leaders like Sam Altman warning of a potential bubble, it might seem logical for investors to pull back. Instead, venture capitalists say they’re doubling down, though in a more deliberate and strategic way.
“Every investor I speak to says 90 percent of new investments are in an A.I.-related field,” Gené Teare, senior data editor at Crunchbase, told Observer. “A.I. is the center. Every one of these investors, they’re looking to invest in companies who are going to be part of the next wave.”
Teare sees current investor buzz centering on coding and customer service startups with A.I. foundations. She added that investors are “very focused on investing in companies at the seed or series A level, who are going to be the emerging or the largest companies 5 to 10 years out.” According to Crunchbase, tomorrow’s most promising companies will likely be in A.I. infrastructure and cybersecurity.
Even with venture funding down from its 2021 peak when it hit $702 billion compared to just over half that in 2024, investors remain active, albeit more selective. “For most of these investors, they’re not investing in a large set of companies. They’re making very targeted bets in companies that they think are going to become formative in the next period,” Teare said. That approach has already fueled record-breaking rounds, including this year’s $40 billion going to OpenAI.
A.I. is changing how VCs invest
A.I.’s rapid evolution isn’t just changing which companies VCs invest in; it’s changing how they invest.
“We are experimenting with how A.I. can help analyze leads,” Michael Stewart, managing partner at M12, Microsoft’s venture capital fund, told Observer. M12’s portfolio includes companies like Livongo by Teledoc Health, HR software Beamery and retail advertising platform GroundTruth. While M12 still sources deals the traditional way, through meetings and networking, the team now uses A.I. to analyze those leads, looking at unit economics, pricing strategies and underlying technology.
Stewart didn’t specify which tools they use, but said M12 has shifted from outside customer relationship management systems to Microsoft’s own technology. Dealmaking platforms like Affinity and Carta also integrate A.I. into their offerings. Last year, Anthropic partnered with Menlo Ventures to launch the Anthology Fund, which uses Claude to recommend startups for investment.
Despite all the changes, some venture capital fundamentals remain. Customer acquisition cost and lifetime value are still pivotal metrics. And founder quality matters more than ever, Crunchbase’s Teare noted. “There are a lot of companies going after the same markets, so it’s the pedigree of the founder,” she said. “That might be a repeat founder who’s done it before, or new founders who have an angle on a market, or a certain energy and grit that they believe could carry it through.”
While some startup founders are opting to bootstrap, Stewart noted that’s rarely an option in A.I. Given the steep costs of hiring top talent, securing GPUs and scaling infrastructure, most cutting-edge A.I. ventures require outside funding despite the technology’s potential to reduce operating expenses.
That competitive environment pushes Stewart to ask founders tough questions: “How are you showing that you’re changing customers’ behaviors? How are you getting them to bring in A.I. at a deeper level of their own company strategy?” With so much A.I. use still experimental, he said, proving real recurring revenue beyond pilot projects is a key differentiator.
Like many A.I. investors, M12 is also eyeing infrastructure. “We’re in this energy-constrained world where we want to scale solutions at a global level,” Stewart said. “If unaddressed, these things become destiny-limiting, so it’s chips, it’s networking, it’s memory, it’s the kinds of endpoints where you deliver A.I.”
Still, challenges lie ahead. As Stewart noted, funding rounds keep getting bigger at earlier stages, creating pressure for those investments to mature. “Mathematically, it is possible to go even larger, but you’re going to need to let those bets we in the VC industry just made mature into those leaders,” he said.