Growing Pains for Startups in the ChatGPT Generation

Good day: ChatGPT’s arrival kicked off a surge in artificial intelligence startups scoring their first venture funding. The number of venture-capital first financings for AI startups in the U.S. went from about 2,150 in 2022 to almost 3,400 last year. Call them the ChatGPT generation.

This cohort seemed, to borrow from the Paul Simon song, to be born at the right time: AI turbocharged revenue growth and attracted deep-pocketed investors.

But the road is rougher these days for many in the ChatGPT generation.

Kaidi Gao, a senior venture-capital research analyst at market tracker PitchBook, said that VCs’ approach to AI investing has changed.

“If anything, the bar seems to be higher, they seem to be more selective, and there just seems to be more acknowledgment among VCs about the potential expensive mistakes that will happen, especially in the AI application layer,” she said. (AI application companies build products on top of foundation models.)

Ethan Kurzweil, managing partner at venture firm Chemistry, said there were some hugely successful AI application startups from the first wave post-ChatGPT, but the second wave faces a precipitous cutoff. Usually the next wave would advance from “new company” through “middle ground,” Kurzweil said, but the middle tier in venture has vanished so that path increasingly looks like a failure mode.

Kurzweil recently wrote on X that the consensus AI boom cycle has venture investors narrowly focused on the next trillion-dollar startup. Like the pink elephant you can’t stop imagining when testing yourself to not think about such a thing, VCs can’t shake the idea of the “Trilicorn.”

“This is where we find ourselves today: funding as a downstream consequence—a self-fulfilling prophecy among us VCs for VCs—of the trillion-dollar pink elephant everyone is chasing,” he wrote.

Even if they fail to get further venture backing, some in the ChatGPT generation will endure and even thrive thanks to powerful new AI tools, according to Nick Candy, head of innovation economy insights, commercial banking at J.P. Morgan. He said that businesses built with AI can have better margins.

There’s another thing: The ChatGPT generation isn’t done expanding.

A recent report from Silicon Valley Bank, a division of First Citizens Bank, said that the SpaceX listing plus the expected public debuts from Anthropic and OpenAI have the potential to generate an unprecedented wave of new startups.

Some AI founders probably wish it was 2023 again.

AI anxiety. The collision of scientific progress, moral imperative and financial incentive has now created a crisis for the AI industry. Development of AI has fueled a ballooning stock market over the past year, a phenomenon that looms even larger with Anthropic and OpenAI both on the precipice of initial public offerings that could value the companies in the trillions. Competition from China has further raised the stakes. Yet the loud warnings being shouted by some inside the companies themselves are proof that the dangers of proceeding—against a backdrop of almost no regulation—are potentially immense.

HOF Capital, a venture firm perhaps best known for its early investments in AI technology companies, recently broadened its reach into private-equity investing by co-leading an investor group in a recent €1 billion, or around $1.16 billion, acquisition of Porsche’s stake in Rimac Group and Bugatti Rimac, an automotive joint venture Rimac had formed with Porsche. HOF Capital co-founder and Managing Partner Hisham Elhaddad spoke to WSJ Pro about the deal as well as how his firm is looking at the challenges and opportunities around investing in AI.

WSJ’s Tech: California event returns to Napa Valley Nov. 3-4. We’ll explore the latest tech industry news with NASA administrator Jared Isaacman, Ford CEO Jim Farley, Zoox CEO Aicha Evans and more. If you’re interested in attending, request an invitation.

Correction: Weston Moyer is co-founder and managing partner at MVP Ventures. Friday’s newsletter incorrectly referred to the firm as VP Ventures.

Growth equity investor Volition Capital closed its Volition Capital Fund VI at its hard cap of $950 million. This latest vehicle brings the Boston-based firm’s total assets under management to over $2.6 billion.

Balderton Capital appointed Luca Bocchio as partner, where he will focus on early-stage investments. Bocchio was most recently a partner at Accel.

Bunkerhill Health, which helps clinical and operations teams build and deploy AI agents, appointed Azita Hamedani as the company’s first chief clinical officer.

Covenant, a Washington, D.C.-based defense technology startup building long-range precision strike weapons, emerged from stealth with $250 million in funding across three rounds. Investors included Andreessen Horowitz, Founders Fund, Lux Capital, 8VC, Aleph and Lightspeed Venture Partners.

Xapien, a Boston-based AI-native due diligence platform, picked up a $56 million investment led by Spectrum Equity.

Archy, a San Jose, Calif.-based AI platform for dental practice management, scored $50 million in Series C funding. JMI Equity led the investment, which included participation from TCV, Entrée Capital, Bessemer Venture Partners and others.

Implicity, an AI-driven cardiac remote monitoring provider based in Paris and Cambridge, Mass., closed a $40 million growth equity round led by IRIS.

Impossible Objects, an industrial-scale 3-D printing company operating in Northbrook, Ill., and Rochester, N.Y., secured $40 million in Series B funding led by Inflection Equity.

Latitude, a Houston-based global payments infrastructure startup, landed $35 million in Series A funding. Oak HC/FT led the investment, which included contributions from New Enterprise Associates, Coinbase Ventures, Lightspeed Venture Partners and others.

Luminary, a New York-based wealth transfer and administration platform, nabbed $22 million in Series A funding. Ten Coves Capital led the round, which saw participation from 8VC and others.

R3 Lithium, a Covington, Ga.-based startup producing lithium carbonate from recycled battery materials, collected $15 million in Series A funding from investors including TDK Ventures and Axial Partners.

UrgentIQ, a New York-based AI-native operating system for urgent care, snagged a $15 million Series A growth investment from Five Elms Capital.

BRKZ, a Saudi Arabia-based building materials procurement platform, raised $31 million in new capital, including $13 million in Series B equity co-led by Wa’ed Ventures and 500 Global.

This newsletter was compiled by Matthew Strozier and Zachary Cole.

Share your tips, comments and questions: vcnews@wsj.com

The team: Matthew Strozier, Yuliya Chernova, Brian Gormley and Sarah Klearman.

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