AI startups dominate VC interest even as funding slips
Artificial intelligence-led startups continued to dominate investor attention in FY26, even as overall funding activity moderated during the year. Total funding fell 9% to $10.1 billion across 977 deals in the fiscal year ended March 31, 2026, compared with $11.3 billion raised across 1,020 deals in FY25, reflecting a broader cooling in capital deployment.
Despite the decline, AI emerged as the clear standout theme, with both AI-native startups and incumbents embedding artificial intelligence into their offerings drawing sustained investor interest. Industry watchers said the generative AI wave has reshaped early-stage investing, intensifying competition among venture capital firms while also pushing them toward greater discipline.
“Competition remains intense, particularly at the seed stage, but it is becoming more disciplined,” said Kushal Bhagia, cofounder and partner at All In Capital. “The best founders still attract multiple term sheets quickly, but investors are becoming more selective… with greater focus on real usage, retention, and how deeply a product integrates into workflows.”
Over the past 12–18 months, rising global capital flows into AI and benchmark pricing set by US markets have led to a sharp increase in deal sizes and entry valuations. Investors say a fear of missing out on category-defining companies accelerated deployment cycles, though signs of stabilisation are beginning to emerge.
“There has also been a strong fear of missing out… which pushed investors to move faster and price more aggressively,” Bhagia said, adding that “the pace of expansion is starting to stabilise as the market matures and fundamentals come back into focus.”
Investment focus is also shifting toward more specialised applications of AI. Vertical use cases across sectors such as healthcare, financial services and enterprise workflows are gaining prominence, with investors prioritising depth of problem-solving over broad-based model access.
“There is a clear shift toward vertical AI applications… differentiation is no longer about access to models but about depth of problem understanding, distribution, and the ability to build products that become part of daily workflows,” Bhagia said.
Meanwhile, investors are also tracking emerging opportunities in governance, security and infrastructure linked to data centres, alongside sovereign-led initiatives. As the ecosystem matures, VCs expect capital to become more selective, rewarding startups that demonstrate durability, monetisation and defensibility over pure growth.
Published on April 1, 2026
