Does 'VC winter' apply to AI investment too? New report says yes.

A shift to specific-use-case artificial intelligence technology and tighter business margins will be necessary for New England AI startups to see more access to capital in 2024, according to a new report.

Value Creation Labs analyzed AI-related investments in New England, primarily in Boston, in industries from cybersecurity to robotics to healthcare. 

Deal count and value in AI and machine learning took a downturn in New England in 2023, after a steady ascent since 2017, according to the Pitchbook data analyzed in the report. This is in line with general venture capital trends in the area and nationally.

“The era of throwing money at AI startups is gone,” said Joe Maglitta, tech analyst and lead author of the report. 

AI-related funding in New England plunged 60% in 2023, while nationally that figure stayed flat, according to the report. 

“We’re seeing what we are calling 'AI winter' right now,” said Maglitta.

Still, the report suggests that Boston is still a “major cluster” for AI investments. It trails only the Bay Area and New York for investor dollars flowing to AI, according to real estate investment firm CBRE. There are 613 AI-related companies in the Greater Boston area, according to the firm. Nearly 97% of the venture dollars to New England companies were sent to Boston- and Cambridge-based firms, according to the report.

“You've got all the right pieces,” said Maglitta. 

Shifting the focus at these companies into vertical applications, and tailored, specific use cases, will be necessary to move the needle back going into 2024, Maglitta said. 

This year is looking to be a rebuilding year, he said. Local startups looking for investment need to be attentive to not get left behind, he added, but Boston as a whole isn’t going to fall off the map.

Running a smart business operationally will better attract investment, Maglitta said. 

“If you are a founder, what's going to impress investors is a really tight business plan, and a really lean operation,” he said. “They're not funding any science experiments anymore.”

Once things normalize after the consecutive years of decline, investors will be looking towards AI-related exits, which have been limited, according to the report.