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.”
Technology
Meet the 21-year-old helping coders use AI to cheat in Google and other tech job interviews
A person walks past the entrance to a Google building in Dublin, Feb. 15, 2023.
Artur Widak | Anadolu | Getty Images
After landing internship offers from Amazon, Meta and TikTok, computer science student Chungin “Roy” Lee has decided to move to San Francisco.
But he won’t be joining any of those companies.
Instead, Lee will be building his own startup that offers a peculiar service: helping software engineers use artificial intelligence to cheat in their technical job interviews.
“Everyone programs nowadays with the help of AI,” said Lee, a 21-year-old student at Columbia University, which has opened disciplinary proceedings against him, according to documents viewed by CNBC. A Columbia spokesperson said the university doesn’t comment on individual students.
“It doesn’t make sense to have an interview format that assumes you don’t have the use of AI,” Lee said.
Lee is at the forefront of a movement among professional coders who are exploiting the limitations of remote job interviews, popularized during the Covid pandemic, by using AI tools off camera to ensure they give hiring managers the best possible answers.
The hiring process that took hold in the work-from-home era involved candidates interviewing from behind a Zoom screen rather than traveling, sometimes across the country, for on-location interviews, where they could show their coding skills on dry-erase boards.
In late 2022 came the boom in generative AI, with the release of OpenAI’s ChatGPT. Since then, tech companies have laid off tens of thousands of programmers while touting the use of AI to write code. At Google, for example, more than 25% of new code is written by AI, CEO Sundar Pichai told investors in October.
The combination of rapid advancements in AI, mass layoffs of software developers, and a continuing world of remote and hybrid work has created a novel conundrum for recruiters.
The problem has become so prevalent that Pichai suggested during a Google town hall in February that his hiring managers consider returning to in-person job interviews.
Google isn’t the only tech company weighing that idea.
But engineers aren’t slowing down.
Lee has turned his cheating into a business. His company, Interview Coder, markets itself as a service that helps software developers cheat during job interviews. The internship offers that he landed are the proof he uses to show that his technology works.
AI assistants for virtual interviews can provide written code, make code improvements, and generate detailed explanations of results that candidates can read. The AI tools all work quickly, which is helpful for timed interviews.
Hiring managers are venting their frustrations on social media over the rise of AI cheaters, saying that those who get caught are eliminated from contention. Interviewers say they’re exhausted from having to discern whether candidates are using their own skills or relying on AI.
‘Invisible’ help
The cheating tools rely on generative AI models to provide software engineers with real-time answers to coding problems as they’re presented during interviews. The AI analyzes both written and oral questions and instantaneously generates code. The widgets can also provide the cheaters with explanations for the solutions that they can use in the interview.
The tools’ most valuable feature, however, might be their secrecy. Interview Coder is invisible to the interviewer.
While candidates are using technology to cheat, employers are observing their behavior during interviews to try to catch them. Interviewers have learned to look for eyes wandering to the side, the reflection of other apps visible on candidates’ glasses, and answers that sound rehearsed or don’t match questions, among other clues.
Perhaps the biggest tell is a simple “Hmm.”
Hiring managers said they’ve noticed that many candidates use the ubiquitous sound to buy themselves time while waiting for their AI tools to finish their work.
“I’ll hear a pause, then ‘Hmm,’ and all of a sudden, it’s the perfect answer,” said Anna Spearman, founder of Techie Staffing, an agency that helps companies fill technical roles. “There have also been instances where the code looked OK, but they couldn’t describe how they came to the conclusion.”
Henry Kirk, a software developer and co-founder of Studio.init in New York, said this type of cheating used to be easy to catch.
“But now it’s harder to detect,” said Kirk. He said the technology has gotten smart enough to present the answers in a place that doesn’t require users to move their eyes.
“The eye movement used to be the biggest giveaway,” Kirk said.
Interview Coder’s website says its virtual interview tool is immune to screen detection features that are available to companies on services such as Zoom and Google Meet. Lee markets his product as being webcam-proof.
When Kirk hosted a virtual coding challenge for an engineering job he was looking to fill in June, 700 people applied, he said. Kirk recorded the process of the first interview round. He was looking to see if any candidates were cheating in ways that included using results from large language models.
“More than 50% of them cheated,” he said.
AI cheating tools have improved so much over the last year that they’ve become nearly undetectable, experts said. Other than Lee’s Interview Coder, software engineers can also use programs such as Leetcode Wizard or ChatGPT.
Kirk said his startup is considering moving to in-person interviews, though he knows that potentially limits the talent pool.
“The problem is now I don’t trust the results as much,” Kirk said. “I don’t know what else to do other than on-site.”
Google CEO Sundar Pichai during an event at the Google for Startups Campus in Warsaw, Poland, Feb. 13, 2025.
Omar Marques | Anadolu | Getty Images
Back to the Googleplex
It’s become a big topic at Google, and one Pichai addressed in February at an internal town hall meeting, where executives read questions and comments that were submitted by employees and summarized by AI, according to an audio recording that was reviewed by CNBC.
One question asked of management was, “Can we get onsite job interviews back?”
“There are many email threads about this topic,” the question said. “If budget is constraint, can we get the candidates to an office or environment we can control?”
Pichai turned to Brian Ong, Google’s vice president of recruiting, who was joining through a virtual livestream.
“Brian, do we do hybrid?” Pichai asked.
Ong said candidates and Google employees have said they prefer virtual job interviews because scheduling a video call is easier than finding a time to meet in available conference rooms. The virtual interview process is about two weeks faster, he added.
He said interviewers are instructed to probe candidates on their answers as a way to decipher whether they actually know what they’re talking about.
“We definitely have more work to do to integrate how AI is now more prevalent in the interview process,” said Ong. He said his recruiting organization is working with Google’s software engineer steering committee to figure out how the company can refine its interviewing process.
“Given we all work hybrid, I think it’s worth thinking about some fraction of the interviews being in person,” Pichai responded. “I think it’ll help both the candidates understand Google’s culture and I think it’s good for both sides.”
Ong said it’s also an issue “all of our other competitor companies are looking at.”
A Google spokesperson declined to comment beyond what was said at the meeting.
Other companies have already shifted their hiring practices to account for AI cheating.
Deloitte reinstated in-person interviews for its U.K. graduate program, according to a September report.
Anthropic, the maker of AI chatbot Claude, issued new guidance in its job applications in February, asking candidates not to use AI assistants during the hiring process.
“While we encourage people to use AI systems during their role to help them work faster and more effectively, please do not use AI assistants during the application process,” the new policy says. “We want to understand your personal interest in Anthropic without mediation through an AI system, and we also want to evaluate your non-AI-assisted communication skills. Please indicate ‘Yes’ if you have read and agree.”
Amazon is also taking steps to combat AI cheating.
The company asks that candidates acknowledge that they won’t use unauthorized tools during the interview or assessment process, spokesperson Margaret Callahan told CNBC.
Chungin “Roy” Lee, a 21-year-old student at Columbia University, is the founder of Interview Coder, a startup that makes software to help computer programmers cheat in job interviews with the help of AI.
Courtesy of Chungin Lee
‘F*ck Leetcode’
If you visit InterviewCoder.co, the first thing that greets you is large gray type that reads “F*ck Leetcode.”
Leetcode is the program used by many tech companies to evaluate software engineers for technical roles. Tech companies such as Meta, Google and Amazon use it to keep tabs on the thousands of job applicants they evaluate.
“Every time I mention interviews, I get frustrated comments about Leetcode,” wrote Ryan Peterman, a software engineer at Meta, in a newsletter posted on Substack in December. Peterman said Leetcode problems are purposely designed to be much harder than what software engineers would do on the job. Leetcode is the best tool companies have to filter hundreds of applicants, Peterman wrote.
Coders said they hate Leetcode because it emphasizes algorithmic problem-solving and asks applicants to solve riddles and puzzles that seem irrelevant to the job, according to those CNBC spoke with as well as comments CNBC found from engineers across various social media platforms. Another downside is that it sometimes requires hours of work that may not result in a job offer or advancement, they said.
Leetcode served as Lee’s inspiration for building Interview Coder, he said. With the help of AI, he said, he created the service in less than a week.
“I thought I wanted to work at a big tech company and spent 600 hours practicing for Leetcode,” Lee said. “It made me miserable, and I almost stopped programming because of how much I didn’t like it.”
Lee’s social media posts are filled with comments from other programmers expressing similar frustrations.
“Legend,” several comments said in response to some of his X posts. Others said they enjoyed him “f—ing with big tech.”
Rival software Leetcode Wizard was also inspired by distaste for Leetcode.
Isabel De Vries, Leetcode Wizard’s head of marketing, told CNBC in a statement that Leetcode-style interviews fail to accurately measure engineering skills and fail to reflect actual daily engineering work.
“Our product originates from the same frustrations many of our users are having,” De Vries said.
Leetcode did not respond to CNBC’s request for comment.
Henry Kirk, a software developer and co-founder of Studio.init in New York, is considering moving job interviews to be on site in response to software engineers using AI to cheat in virtual interviews.
Photo by Krista Schlueter for Inc. Magazine
When Kirk, of Studio.init, posted on LinkedIn in February to vent about his frustrations with AI cheating, he received nearly 200 comments. But most argued that employers should allow candidates to use AI in the hiring process.
“Even the SAT lets you use a calculator,” said one comment. “I think you just make it harder to succeed on purpose when in the real world Google and gpt will always be at my fingertips.”
Lee promotes Interview Coder as being “invisible to all screen-recording softwares.” To prove its effectiveness, he recorded himself passing an Amazon interview and posted the video on YouTube. Amazon and the other companies that had made offers to Lee then rescinded them.
Lee got hundreds of comments praising the video, which YouTube removed after CNBC reached out to Amazon and Google for this story. YouTube cited a “copyright claim” by Amazon as the reason for removing the video.
“I as an interviewer am so annoyed by him but as a candidate also adore him,” former Meta staff engineer Yangshun Tay, co-founder of startup GreatFrontEnd, wrote in a LinkedIn post about Lee and his video. “Cheating isn’t right, but oh god I am so tired of these stupid algorithm interviews.”
After YouTube removed the video, Lee uploaded it once again.
Cheating as a service
Lee said he never planned to work at Amazon, Meta or TikTok. He said he wanted to show others just how easy it is to game Leetcode and force companies to find a better alternative.
And, he said, he’s making money in the process.
Interview Coder is available as a subscription for $60 a month. Lee said the company is on track to hit $1 million in annual recurring revenue by mid-May.
He recently hired the internet influencers who go by the name “Costco Guys” to make a video marketing his software.
“If you’re struggling to pass your Leetcode interviews and want to get a job at a big tech company, you’ve got to take a look at Interviewcoder.co to pass your interview,” the Costco Guys say in their video. “Because Interview Coder gets five big booms! Boom! Boom! Boom! Boom! Boooooom!”
Leetcode Wizard bills itself on its website as “The #1 AI-powered coding interview cheating app” and “The perfect tool for achieving a ‘Strong Hire’ result in any coding interview and landing your dream job at any FAANG company.” Leetcode Wizard charges 49 euros ($53) a month for a “Pro” subscription.
More than 16,000 people have used the app, and “several hundred” people have told Leetcode Wizard that they received offers thanks to the software, the company told CNBC.
“Our product will have succeeded once we can shut it down, when leetcode interviews are a thing of the past,” De Vries said.
Lee said he’s moving from New York to San Francisco in March to continue building Interview Coder and start working on his next company.
Kirk said he understands software engineers’ frustration with Leetcode and the tech industry. He’s had to use Leetcode numerous times throughout his career, and he was laid off by Google in 2023. He now wants to help out-of-work engineers get jobs.
But he remains worried that AI cheating will persist.
“We need to make sure they know their stuff because these tools still make mistakes,” Kirk said.
Half of companies currently use AI in the hiring process, and 68% will by the end of 2025, according to an October survey commissioned by ResumeBuilder.com.
Lee said that if companies want to bill themselves as AI-first, they should encourage its use by candidates.
Asked if he worries about software engineers losing the trust of the tech industry, Lee paused.
“Hmm,” he mumbled.
“My reaction to that is any company that is slow to respond to market changes will get hurt and that’s the fault of the company,” Lee said. “If there are better tools, then it’s their fault for not resorting to the better alternative to exist. I don’t feel guilty at all for not catering to a company’s inability to adapt.”
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