AI craze is distorting VC market, as tech giants like Microsoft and Amazon pour in billions of dollars
Amazon Web Services CEO Adam Selipsky speaks with Anthropic CEO and co-founder Dario Amodei during AWS re:Invent 2023, a conference hosted by Amazon Web Services, at The Venetian Las Vegas in Las Vegas on Nov. 28, 2023.
Noah Berger | Getty Images
Almost three years into a largely dormant IPO cycle, venture capitalists are in a tough spot.
The private market is dotted with richly valued artificial intelligence startups, including some that are described as generational companies. But venture firms in need of exits aren’t going to get relief from AI anytime soon.
That’s because, unlike prior tech booms, VCs aren’t at the center of this one. Rather, the biggest companies in the industry — Microsoft, Amazon, Alphabet and Nvidia — have been pouring in billions of dollars to fuel the growth of capital-intensive companies like OpenAI, Anthropic, Scale AI and CoreWeave.
With some of the most well-capitalized companies on the planet flinging open their wallets to fund the generative AI craze, the normal pressures to go public don’t apply. And even if they did, this batch of startups is nowhere near showing off the profitability metrics that public investors need to see before taking the plunge.
Tech giants have more than money. They’re also throwing in tangible benefits like cloud credits and business partnerships, packaging the types of incentives that VCs can’t match.
“The AI startups we talk to are having no problems fundraising at robust valuations,” Melissa Incera, an analyst at S&P Global Market Intelligence, told CNBC. “Many are still reporting having too much unsolicited investor interest at the moment.”
Add it all up and venture investors are maneuvering through a deep market distortion with no clear end in sight. U.S. VC exit value this year is on track to reach $98 billion, down 86% from 2021, according to an Aug. 29 report from PitchBook, while venture-backed IPOs are expected to be at their lowest since 2016. Traditional VCs are actively trying to play in AI, but they’re mostly investing higher up the so-called stack, putting money into nascent startups building applications that require far less capital than the infrastructure businesses powering generative AI.
So far in 2024, investors have pumped $26.8 billion into 498 generative AI deals, including from strategic investors, according to PitchBook. That continues a trend from 2023, when generative AI companies raised $25.9 billion for the full year, up more than 200% from 2022.
According to Forge Global, which tracks private market transactions, AI as a percentage of total fundraising jumped from 12% in 2023 to 27% so far this year. The average round for AI companies is 140% bigger this year compared to last, the data shows, while for non-AI companies the increase is only 10%.
Chip Hazard, co-founder of early-stage firm Flybridge Capital Partners, says investing dollars are shifting “up the stack” and that “enduring companies will be built at the application layer.”
That’s all going to take time to develop. In the meantime, startup investors continue to suffer from the fallout of the market turn that began in early 2022, when soaring inflation led the Federal Reserve to lift interest rates, pushing investors out of risky assets and into more conservative investments that finally offered yield.
Tech stocks have since bounced back, driven by Nvidia, whose chips are used in training most of the AI models, and other mega-cap stocks like Microsoft, Meta and Amazon. The Nasdaq hit a record in July before selling off a bit of late. But IPOs and pricey acquisitions have been few and far between, leaving venture firms with minimal returns for their limited partners.
“Managers are having a difficult time raising additional funds without delivering LP returns, especially because more liquid, lower-risk investments now have attractive yields thanks to high interest rates,” PitchBook wrote in its August report.
The one pure AI company that appears close to going public is Cerebras, a chipmaker founded in 2016 that’s backed by some traditional VCs including Benchmark and Foundation Capital. As a semiconductor company, Cerebras never reached the lofty valuations of the AI model developers and other infrastructure players, topping out at $4 billion in 2021, prior to the market’s downward tilt.
Cerebras said in late July that it had confidentially filed its IPO paperwork with the SEC. The company still hasn’t filed its public prospectus. A Cerebras spokesperson declined to comment.
When it comes to the foundational model companies, the astronomical valuations they quickly commanded put them in a very “different league,” outside of the realm of VCs, said Jeremiah Owyang, a partner at Blitzscaling Ventures.
It’s “very challenging for VCs to be promising any exits right now, given the market conditions,” Owyang said, adding that early-stage investors may not see returns for seven to 12 years on their newer bets. That’s for their companies that ultimately succeed.
Elbowing into big rounds
Firms like Menlo Ventures and Inovia Capital are taking another route in AI.
In January, Menlo disclosed that it was raising a so-called special purpose vehicle (SPV) — called Menlo Inflection AI Partners — as part of a $750 million funding round in Anthropic in a deal that valued the company at more than $18 billion. Since Anthropic’s launch in 2021, Amazon has been the company’s principal backer as it tries to keep pace with Microsoft, which has poured billions of dollars into OpenAI and is reportedly part of an upcoming funding round that will value the ChatGPT creator at over $100 billion.
Menlo had previously invested in Anthropic in 2023 at a valuation of about $4.1 billion. To put in more money at a much higher price, Menlo had to go outside of its main $1.35 billion fund that closed last year. In raising an SPV, a venture firm typically asks for LPs to put money into a separate fund dedicated to a specific investment, rather than a portfolio of companies. Menlo filed to $500 million for the SPV.
In July, rival startup Cohere, which focuses on generative AI for enterprises, announced a $500 million funding round from investors including AMD, Salesforce, Oracle and Nvidia that valued the company at $5.5 billion, more than doubling its valuation from last year.
Cohere confirmed to CNBC that part of the financing, as well as some of its previous fundraising, came through an SPV. Inovia, based in Montreal, organized the latest SPV, and Shopify CEO Tobias Lutke was one of the participants.
Representatives from Menlo and Inovia didn’t respond to requests for comment.
Some investment banks have also put together SPVs to allow multiple investors to pool capital into a hot company. JPMorgan Chase told CNBC that clients “have been able to access several leading AI investments” through the bank’s Morgan Private Venture unit.
Still, for investors to get a return there has to be an IPO at some point, as the regulatory environment makes it virtually impossible for big tech companies to orchestrate significant acquisitions. And companies like Microsoft, Alphabet, Amazon and Nvidia can be plenty patient with their investments — they have a combined $280 billion in cash and marketable securities on their balance sheets.
IPO pipeline will ‘continue to build’
The other potential path for liquidity is the secondary market, which involves selling shares to another investor.
Elon Musk’s SpaceX, which reportedly valued itself at over $200 billion in a recent employee tender offer, has enabled investor shares through secondary transactions. That may be what’s eventually in store for some investors in xAI, Musk’s 18-month-old AI startup, which is already valued at $24 billion after raising a $6 billion round in May.
But SpaceX is an outlier. For the most part, secondary transactions are viewed as a way for founders and early investors to cash out a portion of their stock in a high-valued company, not a way for VCs to generate returns. For that they need IPOs.
SpaceX’s Polaris Dawn Falcon 9 rocket sits on Launch Complex 39A of NASA’s Kennedy Space Center on August 26, 2024 in Cape Canaveral, Florida.
Joe Raedle | Getty Images
Michael Harris, global head of capital markets at the New York Stock Exchange, told CNBC recently that NYSE is in dialogue with “a number of AI-focused companies” and said that, “as the industry evolves we’d expect that pipeline to continue to build.”
A select few AI companies have hit the public market this year. Astera Labs, which sells data center connectivity to cloud and AI infrastructure companies, debuted on the Nasdaq in March. The company is valued at about $6.5 billion, down from $9.5 billion after its first day of trading.
Tempus AI, a health-care diagnostics company backed by Google, went public in June. The stock is up around 50% from its debut, valuing the company at $8.6 billion.
The IPO floodgates never opened, though, and high-profile AI companies aren’t even talking about going public.
“Unless there is a dramatic shift in market sentiment, I would be hard-pressed to see why these AI startups would put themselves in the public spotlight when they can keep growing privately at such favorable terms,” said S&P’s Incera. Going public “would only amp up pressure to show returns or reduce spending, which for a lot of them is not a feasible ask at this point in the maturity curve,” she said.
Most venture investors are bullish on the potential for generative AI to eventually create big returns at the application layer. It’s happened in every other notable tech cycle. Amazon, Google and Facebook were all web applications built on top of internet infrastructure. Uber, Airbnb and Snap were a few of the many valuable apps built on top of smartphone platforms.
John-David Lovelock, an analyst at Gartner and a 35-year veteran of the IT industry, sees a big opportunity for generative AI in the enterprise. Yet, in 2024, only 1% of the trillion dollars spent on software will be from businesses spending on generative AI products, he said.
“There is money being spent on certain GenAI tools and the few applications that exist,” Lovelock said. “However, broad-scale rollout of GenAI within the broad enterprise software catalogue of products has not yet occurred.”
Broadcom CEO Hock Tan.
Lucas Jackson | Reuters
Broadcom’s quarterly results and guidance sailed past Wall Street estimates. It didn’t matter.
The chipmaker’s shares plummeted 11% on Friday, on pace for their worst day since January, as investors ran for the exits on the artificial intelligence trade. Oracle dropped 4% a day after plunging 10% following its earnings report.
AI has been the driver for the stock market and the broader economy this year, so any negative sentiment has potentially far-reaching consequences. The Nasdaq on Friday fell about 1.4%, and the S&P 500 declined declined by nearly 1%.
The companies getting hit the hardest are the ones most closely tied to AI infrastructure, which has been booming as hyperscalers build out their data centers to try and meet what they describe as insatiable demand for compute-intensive AI services. Broadcom makes custom chips for many of the the largest tech companies, and saw its market cap about double each of the past two years before rallying again in 2025.
“This stock is up 75-80% year to date. You’re seeing a little bit of a pullback,” Vijay Rakesh, an analyst at Mizuho, told CNBC’s “Squawk on the Street” on Friday. “We would be buyers on this pullback.”
Mizuho raised its price target on the stock to $450 from $435. It was trading below $364 as of Friday afternoon.
“This is still where the growth is,” Rakesh said. “They are still the big supplier to Google on their entire hardware stack, to Meta, to Anthropic and even OpenAI coming down the road.”
Broadcom reported revenue growth of 28% during the quarter, largely due to a 74% increase in AI chip sales, to a total of $18.02 billion, topping the $17.49 billion average analyst estimate, according to LSEG. Adjusted earnings per share of $1.95 adjusted topped the $1.86 average estimate.
CEO Hock Tan said Broadcom expects AI chip sales this quarter to double from a year earlier to $8.2 billion, both from custom AI chips as well as semiconductors for AI networking.
One concern among investors is that margins are coming down, at least in the short term, due to higher upfront costs. CFO Kirsten Spears said on the earnings call that “gross margins will be lower” for some of Broadcom’s AI chip systems because the company will have to buy more parts to produce the server racks.
Broadcom also said it had a $73 billion backlog of AI orders over the next 18 months. Part of that is from $21 billion of orders from Anthropic, which the company revealed as a key customer on Thursday.
While OpenAI has been a highly touted customer following a multibillion-dollar agreement announced in October, Tan doused some hope for the deal, telling investors late Thursday that, “We do not expect much in ’26.”
Bernstein analyst Stacy Rasgon said in a note on Friday that “AI angst” was driving Broadcom’s shares lower.
“Frankly we aren’t sure what else one could desire as the company’s AI story continues to not only overdeliver but is doing it at an accelerating rate,” Rasgon, who recommends buying the stock and raised his price target, wrote in the note.
Oracle has been facing more extreme skepticism. The stock is now down more than 40% from its record reached in September. The company beat on earnings but missed on revenue in its report on Wednesday, and investors were disappointed they didn’t get more detail on how Oracle will finance its massive buildout that so far has required mounds of debt.
CoreWeave, which is investing in data centers to offer cloud-based AI services, sank 9% on Friday and has lost more than half its value since peaking in June.
Rivian CEO RJ Scaringe at the company’s first “Autonomy and AI Day” on Dec. 11, 2025, in Palo Alto, California.
Lora Kolodny | CNBC
Rivian Automotive impressed Wall Street on Thursday with its plans for artificial intelligence, automation and an internally developed silicon chip, but significant challenges involving demand and capital remain for the electric vehicle maker.
Despite Wall Street analysts expressing some optimism following Rivian’s first “Autonomy and AI Day,” the company’s stock fell 6.1% to close Thursday at $16.43 per share. But shares recovered during intraday trading Friday and were up more than 15%.
While the event didn’t cause many analysts to change ratings or price targets, Needham raised its price target on Rivian by 64% to $23 per share. The firm did so on the tech announcements and potential for future licensing deals, as well as higher-than-consensus expectations on deliveries next year of the company’s new midsize R2 SUV.
“RIVN signaled a shift from an [automaker] adopting autonomy to one leveraging AI to build end-to-end autonomy,” Needham analyst Chris Pierce said in a Friday investor note.
The company’s stock had ramped up heading into the AI Day, but many analysts believed the announcements from the event were already “priced in.” Shares also fell as OpenAI made its own AI announcement Thursday, revealing its most advanced model yet.
“We attended Rivian’s Autonomy & AI Day yesterday in Palo Alto and came away mostly impressed with the strategic direction outlined by management,” Deutsche Bank analyst Edison Yu said Friday in an investor note. “However, the stock’s weakness seems warranted given the run-up since earnings and lack of a major AI partnership/deal announcement.”
Rivian’s announcements included a proprietary chip, RAP1, designed for “physical AI,” namely autonomous driving; an evolved software architecture, or “brains” of the vehicle; a new AI assistant; and a roadmap for getting to “personal L4,” or fully self-driving personally owned vehicles.
The latter begins later this month with an update involving its hands-free driving system, followed by plans to continue to expand capabilities until vehicles reach full autonomy in the years ahead. Rivian did not disclose a timeframe for the full autonomy or potential robotaxi fleet autonomous vehicles.
Leading up to the event, Rivian shares were up more than 30% to $17.50. Despite those gains, shares remain well off the levels of the company’s IPO of $78 per share in 2021.
Barclays analyst Dan Levy and others said while Rivian’s technology announcements, including the surprise proprietary chip, were impressive, the company remains a “show me” story amid more challenging market conditions.
“With RIVN facing a tougher path to breakeven on core vehicle sales alone, we believe with enhanced AV/AI capabilities RIVN is further paving the path to additional software/service revenues, which would be margin accretive,” Levy said Friday in an investor note. “To be clear, there is certainly a ‘show me’ element for RIVN on its capabilities.”
Challenges include slumping EV demand following the end of up to $7,500 tax credits in September, lack of other support under the Trump administration and internal struggles at the company involving products and capital.
Several analysts noted the adoption of advanced driver assistance systems remains low across the industry, even at U.S. EV leader Tesla, and Rivian is continuing to play catch up to other companies that have offered such systems for years.
Shares of “pure EV” plays Tesla, Rivian and Lucid in 2025.
Rivian founder and CEO RJ Scaringe and other executives argued that the company’s vertical integration of in-house capabilities including software, AI, vehicle platforms and other technologies will allow the automaker to be more efficient, quicker and better than others.
“AI is enabling us to create technology and customer experiences at a rate that is completely different from what we’ve seen in the past,” Scaringe said during the event.
Such arguments, as well as the automaker’s prior $5.8 billion joint venture software deal with Volkswagen, have led Wall Street to price Rivian’s software business higher than its core of producing and selling EVs, given market conditions.
A $12 price target for Rivian shares from Morgan Stanley, which recently downgraded the company to underweight, includes $7 for software and services and $5 for its core automotive business. Several analysts added that Rivian might be able to license or sell its newest technologies, including chips.
“RIVN is developing a suite of hardware and software offerings to remain competitive in an Auto 2.0 world. However, several risks remain around demand, potentially limiting data capture needed to reach higher levels of autonomy,” Morgan Stanley’s Andrew Percoco said in a Friday note.
Morgan Stanley raised concerns about autonomy adoption rates, lackluster EV demand ahead of Rivian’s new “R2” vehicle next year and a prolonged path to profitability as reasoning for the rating confirmation.
Rivian R2 is showcased at the company’s first Autonomy and AI Day showcasing developments in self-driving technology, in Palo Alto, California, U.S., Dec. 11, 2025.
Carlos Barria | Reuters
RBC Capital Markets analyst Tom Narayan agreed: “The advancements enhance Rivian’s product offering but do not address ongoing concerns around liquidity and R2/R3 profitability.”
Rivian continues to lose billions of dollars annually, despite significant cost reductions and gains in software revenue thanks to its deal with VW.
Rivian ended the third quarter with $7.7 billion in total liquidity, including nearly $7.1 billion in cash, cash equivalents and short-term investments that Scaringe has said position the company “really well” for the R2 launch.
The R2 midsize SUV is crucial for Rivian — especially since it’s a major market in the U.S. With expectations of a $45,000 starting price, it is anticipated to broaden Rivian’s customer base and be a proof-point for the company’s efforts regarding profitability and cost savings.
Rivian’s current R1 pickup truck and SUV consumer models start at more than $70,000. It also builds electric delivery vans, largely for its biggest shareholder Amazon, that start around $80,000.
“Profitability pressure will likely intensify as Rivian rolls out its ~$45K R2 platform in the highly competitive mid-size SUV segment,” Narayan said. “While targeting a lower price point could increase market reach, the R1 platform’s struggles with profitability despite being nearly double the price of the R2 raise.”
Shares of Rivian, with a $22.5 billion market cap, are rated hold with a $15.43 per share price target, according to average ratings and estimates compiled by FactSet.
— CNBC’s Michael Bloom contributed to this report.
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