Next big wave in tech investing? Watch out for AI ‘technology unicorns’

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RESEARCH TRIANGLE PARK- Pitchbook, the private-market data company, released its H1 VC Tech Survey this morning packed with news – from anticipating startup breakthroughs courtesy of AI to declines in VC funding levels for the coming year.

The report compiled survey responses from 58 venture investors who were asked questions about the potential for technological impacts on the startup ecosystem. Among the topics: AI and its potential impacts, the recent SVB collapse, and 2022’s “tech wreck.”

Pitchbook graphic

AI ‘Unicorns’

Investors responded favorably to the potential for technology innovation and adoption in AI, climate tech, biotech, and fintech.

In climate tech, the continued demand for energy efficiencies and carbon reductions are driving strong innovations. But the report attributes much of the innovative expectations for fintech and biotech startups to AI.

The explosion in popularity of ChatGPT and its rivals is leading many startups to investigate generative AI, either for productivity improvements or customer experience enhancements. More than 97% of respondents indicated that they expected generative AI to be “highly” or “moderately disruptive” over the next 5 years, and more than 70% believe a wave of AI-inspired “technology unicorns” is on the horizon.

The survey says:

“We expect organizations and startups to begin investing significantly in building out generative AI capabilities for both productivity and efficiency initiatives and to enhance the customer experience. Survey respondents also noted climate technologies and biotech as significant sources of innovation. We expect climate technologies will continue to benefit from both regulatory and consumer demand for carbon-controlling technologies and the continued efforts to make power grids more sustainable. The biotech industry has continued to churn ahead despite the broader pullback in the market and has benefited from modern AI technologies accelerating the pace of drug discovery.”

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Tech Wreck Yields: pros and cons

Survey respondents were nearly perfectly split evenly on whether the “tech wreck” – the outsized decline in tech sector stocks last year – will improve or harm technical innovation. Some investors believe the decline will stagnate growth and innovation, and scare off investors. Others pointed to the market pullback that has enabled tech layoffs as offering startups the chance to compete for talent. Some comments also pointed to the slowdown as allowing for more accurate startup valuations. Respondents also put opposing spins on the companies being driven out of the market: some comments focused on the loss of good businesses, while others believe the market pullback is thinning the herd to reduce support for unnecessary or weak innovations.

Despite the opposing views on the tech wreck, respondents were in sync regarding the economic impact of higher interest rates with 72% indicating that is likely to be the biggest impact on technology over the next few years. Political polarization, the war in Ukraine, and tech industry layoffs were the less-cited concerns, each below 10%.

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SVB Collapse hits startup funding

Pitchbook characterized the responses as “steady and cautious.” More than 43% of investors expect investment to drop over the next year, and 61.6% believe the SVB collapse will cause “extremely” or “mildly” reduced funding for startups over the same period. Despite these stats and a relatively quiet IPO market, early-stage investing remains popular for nearly 60% of respondents. And VCs indicated that their investment stakes have remained relatively consistent over the last 12 months.

There is still a strong preference for targeted technology funds over more general funds with the prior easier to raise.  This may be tied to a more direct expectation for success; 32% of VC responses indicated that a startup’s “path to profitability” has become more important than before. While funding will certainly tighten up, 2023 expectations are high for IRR (internal rate of return).

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