While seed-stage funding deals hit a four-year low in 2024, the tide seems to be turning this year. In the last two months, early-stage investors have seen a pick up in the number of term sheets signed for seed investments, particularly for AI startups, as well as an inflow of good-quality founders, industry executives said.
“Seed-stage deals are picking up this year and we are seeing some of the exuberance come back, driven largely by AI startups,” said Abhishek Srivastava, general partner at Kae Capital, early-stage investment firm. “In the last few weeks, we have seen more term sheets and expect more deals through the year versus the previous,” he added.
Last year, the number of seed funding rounds plummeted 40% to 925, down from 1,545 in the previous year, while early and late-stage investments managed some gains, Tracxn data showed. The total funding raised also shrank 22% last year, barely crossing $971 million, reflecting a growing investor hesitancy to back untested business models.
But the booming IPO market in the second half of last year improved macro sentiments in the startup ecosystem, after more than two years of a funding slump, said one investor. In fact, VCs saw record public market exits of $4.6 billion last year. Moreover, the span of investment opportunities have also expanded with more founders building AI solutions.
“There’s definitely a surge in seed-stage AI deals, but it’s not a free-for-all where any AI startup can raise capital. Investors are being selective, focusing on startups that bring real differentiation, deep-tech innovation, and strong business fundamentals,” Ashutosh Kumar Jha, general partner at Expert Dojo, a US-based early-stage accelerator and VC firm.
Sectors like AI, fintech and climate tech are picking up momentum, while industries that thrived on high burn are facing longer due diligence and tougher scrutiny, Jha added.
Moreover, thanks to the exuberance in AI deals, valuations have remained elevated. AI deals are being valued at 2.5-3x of non-AI business models, making some investors concerned about the price.
“There seems to be some artificiality in the valuations but investors are willing to pay that premium because AI startups are starting to create their own benchmarks with a lot more non-linearity than otherwise seen in traditional business models,” Kae Capital’s Srivastava said.
AI-driven pick-up
No. of seed funding rounds plummeted 40% to 925 in 2024, down from 1,545 in 2023 — The total funding raised also shrank 22% last year, barely crossing $971 million — The booming IPO market in the second half of last year improved macro sentiments in the startup ecosystem — In fact, VCs saw record public market exits of $4.6 billion last year.