Despite huge rally in tech stocks, VC investors aren't sure markets are stable and have slashed spending

• Despite huge rally in tech stocks, VC investors still slashed spending in the second quarter.
• Global VC spending sank 49% annually, as macroeconomic trends and an inactive IPO market kept investors away.

Hype around artificial intelligence helped drive momentum in this year's tech rally, but not every corner of the market has met the moment with financial enthusiasm.

The Nasdaq has soared more than 30% so far this year, but data from Crunchbase shows venture capital spending has continued to fall. Global VC funding stood at at $65 billion in the second quarter, a 49% decline year over year and an 18% decline quarter over quarter.

In a separate note, DataTrek Research cofounder Jessica Rabe attributed the decline to the uncertain macroeconomic environment and dampened investor appetite, except for AI.

"As much as public tech companies have rallied this year, VC investors aren't yet convinced equity markets will remain stable. Whether VC funding finally trends higher in 2H 2023 will come down to the emergence of more successful venture-backed IPOs, especially for later stage startups," she wrote.

Spending has been on the downturn since late 2022; it's a turnaround from the preceding year's hot market, when late-stage VC funding would close at or above $100 billion per quarter.

The current environment has already resulted in job cuts and among startups, and some companies could be expected to shut down into 2024. Meanwhile, the IPO market has largely been subdued this year.

Rabe also noted AI accounted for 18% of all global venture spending in the first half of 2023. This was led by Microsoft, which accounted for 40% of total capital in AI-linked startups.

But the bottom line is that VCs respond to economic and stock market conditions instead of set them, she said, pointing out that monthly VC funding peaked in November 2021, when the Nasdaq also hit its all-time high.