Despite the ongoing hype and investment into generative artificial intelligence startups, venture capital funding fell again in the second quarter, according to a new report today from Crunchbase Inc.

VC funding fell 18% in the second quarter from the first quarter and 49% year-over-year, to $65 billion. The Crunchbase report noted that the reduction mirrors an ongoing trend in the VC landscape, with each quarter’s funding total falling by more than 45% year-over-year since the third quarter of 2022.

Venture capital funding in the year’s first half was similarly down 10% from the second half of 2o22, to $144 billion, and down 51% from the first half of 2022. However, the figure could have been much worse, with nearly a fifth of the total global funding in the first half of the year coming in the AI sector. Large investments from companies such as Microsoft Corp., Nvidia Corp. and Google LLC boosted the AI investments.

Despite the new capital flowing into AI, total deal volume across all VC stages fell significantly, down 37% year-over-year. Late-stage funding led the list with $31 billion raised in the second quarter, the lowest recorded quarter since 2018. Early-stage funding, which through late last year had been somewhat resilient, also witnessed a downturn, reaching only $27 billion in the quarter, a 45% drop from the previous quarter.

While AI gained the most attention, other sectors, such as retail and energy, did see substantial venture capital funding rounds. Notable large retail rounds included China-based fast fashion retailer Shein, Germany-based solar company 1Komma5° and Sweden-based battery manufacturer Northvolt.

The downturn in overall funding, characterized by its slower pace and decreased deal volume, is also noted in the report to have created challenges for startups. Many companies that secured funding in the more favorable market of 2021 have had no choice but to cut costs — primarily through job reductions — to extend their financial runway.

In addition, the report noted, the progression from seed to Series A funding has become a more formidable hurdle for startups. With the ongoing decline, the report noted that the current situation will lead to an increase in company closures in the second half of 2023 and into 2024.

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