AI craze is distorting VC market, as tech giants like Microsoft and Amazon pour in billions of dollars

Almost three years into a largely dormant IPO cycle, venture capitalists are in a tough spot.

The private market is dotted with richly valued artificial intelligence startups, including some that are described as generational companies. But venture firms in need of exits aren't going to get relief from AI anytime soon.

That's because, unlike prior tech booms, VCs aren't at the center of this one. Rather, the biggest companies in the industry — Microsoft, Amazon, Alphabet and Nvidia — have been pouring in billions of dollars to fuel the growth of capital-intensive companies like OpenAI, Anthropic, Scale AI and CoreWeave.

With some of the most well-capitalized companies on the planet flinging open their wallets to fund the generative AI craze, the normal pressures to go public don't apply. And even if they did, this batch of startups is nowhere near showing off the profitability metrics that public investors need to see before taking the plunge.

Tech giants have more than money. They're also throwing in tangible benefits like cloud credits and business partnerships, packaging the types of incentives that VCs can't match.

"The AI startups we talk to are having no problems fundraising at robust valuations," Melissa Incera, an analyst at S&P Global Market Intelligence, told CNBC. "Many are still reporting having too much unsolicited investor interest at the moment."

Add it all up and venture investors are maneuvering through a deep market distortion with no clear end in sight. U.S. VC exit value this year is on track to reach $98 billion, down 86% from 2021, according to an Aug. 29 report from PitchBook, while venture-backed IPOs are expected to be at their lowest since 2016. Traditional VCs are actively trying to play in AI, but