The rise of AI Cash Boom mask “zombies” as funding gap widens in startup ecosystems
Artificial intelligence continues to dominate venture capital headlines and checks – but a new Silicon Valley Bank (SVB) report warns that a surge in AI investment is covering up the growing gap in the startup ecosystem, with many non-businesses biasing capital and so-called “Zombiecorns.”
AI-centric venture capital accounts for 40% of VC fundraising in the U.S. in 2023, compared with just 10% two years ago, according to the SVB Enterprise Software Report report released Tuesday. In enterprise software alone, AI startups attract 45% of investment, compared to just 9% in 2022.
Much of this is powered by large giants (Megadeals), a funding round of $100 million or more – the AI giants (Openai) and human giants (Anthropic) have captured half of all the cash raised in the category.
“Excluding changes in AI investments and stories,” the report warned. “There is no meaningful rise for companies that do not leverage AI, and the group's investment was basically flat last year.”
The wider market continues to suffer from severe exit conditions, with a hangover of inflation rates and rising interest rates that began at the end of 2021. While there are signs of life in the technology IPO market, Etoro's recent Nasdaq debut and Hinge Health's upcoming list provide some encouragement, but momentum is still focused on AI.
For example, AI infrastructure company Coreweave's first revenue report saw 420% increase in revenue, pushing its stock up 56% in a week. But similar IPO success is still very rare, especially outside the AI field.
Despite the high private valuation, many of the largest AI players, including OpenAI, anthropomorphism, confusion and Scale AI, have no immediate plans to be made public. Their demand for billions of dollars in infrastructure investments (without near-term returns) makes it difficult for venture capital firms to realize returns, with little to no rest to support startups in other sectors.
This imbalance helps exacerbate the rise of “zombies,” a term used by SVB to describe startups that raise a lot of capital but lack sustainable revenue growth or viable business models.
“Many people risk ending on land without people,” the report states.
Tom Glason, CEO and co-founder of ScaleWise, said the report highlights the growing issues of the AI investment boom.
“The SVB report highlights the harsh fact that the AI boom promotes a wave of overfunded startups that look healthy on the ground but are commercially hollowed out below,” Glasson said. “These so-called 'zombies' have caused another huge round but failed to build sustainable income or viable unit economics.”
Glason believes that too many founders are mistaken for money raised for market traction – market strategies that increasingly demand discipline in the market, not just product hype.
“The gap between well-funded AI startups and people who can actually scale is widening,” he added. “In today's market, just growing is not enough. Without a clear ideal customer profile, repeatable sales motions and structured execution, even the most popular AI companies have the potential to be a cautionary tale.”
Hope President Trump's return to the White House hopes will improve the startup scene through tax cuts and deregulation, and announced in April that his aggressive new tariff policy has brought him under measures. Several companies have delayed planned IPOs to cope with uncertainty.
SVB is now part of First Citizen Bank after its bankruptcy in 2023, concludes that resuming emerged exit activity is crucial to restarting venture capital back and fueling the next wave of entrepreneurship.
But for now, AI is still the hottest ticket in town, but is increasingly likely to burn down those who mistakenly believe fundamental funds.
