Investors Sound Alarm Over Rising Trends of ‘Zombiecorns’ in AI Startups

Venture capital investments in AI startups have surged dramatically, now making up 45% of U.S. enterprise software funding. However, concerns are mounting over the sustainability of many firms, referred to as ‘zombiecorns,’ which struggle with revenue growth despite large funding rounds. Industry leaders warn that the focus on AI could obscure support for other crucial technologies.

The landscape of AI startups has become a bit of a mixed bag lately. While there’s a flood of cash pouring into the sector, the situation isn’t as rosy as some might think. A recent report from Silicon Valley Bank indicates that around 40% of venture capital raised last year was focused on AI, up dramatically from only 10% in 2021. This boom translates to AI firms claiming a hefty 45% of US enterprise software investment, a leap from just 9% in 2022.

What’s driving this surge? Well, according to the report, it’s the prevalence of what they call ‘megadeals’—those hefty rounds of funding exceeding $100 million. In the first quarter of 2025 alone, there were 107 such deals. Major players like OpenAI and Anthropic are taking the lead, making headlines and sparking considerable excitement in the market. However, amidst all this enthusiasm, dangers lurk beneath the surface of the seemingly thriving startups.

While investors are optimistic, concerns over long-term sustainability of many startups are rising. The report suggests that firms outside the AI space are facing a tough battle when it comes to securing funding. Companies not tapping into the AI gold rush are left in the dust, as funds appear to be gravitating towards AI-centered businesses. The SVB report states, “Exclude AI investment and the story changes.” This is underwritten by an essentially flat investment trend for non-AI companies.

Sam Hields from OpenOcean voiced a critical concern regarding the obsession with AI. He noted that while the click-bait attraction of AI may draw in capital, it risks starving other innovative technologies of the funding they need to thrive. Hields puts it bluntly, “As capital gets more and more concentrated into AI, we risk sucking the oxygen out of the room for other breakthrough technologies.”

Amid the hype, the emergence of ‘zombiecorns’—startups that have raised significant cash but lack sustainable revenue—is becoming alarming. As noted in the SVB report, many of these companies appear to be painfully underprepared for the market post-funding. They struggle with delayed revenues and high operational costs, leaving them vulnerable in an increasingly competitive environment.

Tom Glason, CEO of ScaleWise, emphasized the sobering reality these so-called ‘zombiecorns’ are facing. “These startups look healthy on the surface, but are commercially hollow underneath,” he said, highlighting how founders often misinterpret capital raised for real market traction.

As more and more firms pivot to become ‘AI companies’ to catch up with the trend, this can lead to a shallow implementation that lacks real substance. Hields echoed those sentiments, warning against the superficiality that’s emerging. The temptation to slap an AI label onto existing solutions is strong, but it won’t yield solid returns in the long run.

“Today, folding an LLM into your product is enough to claim an ‘AI badge’… But that won’t deliver durable returns,” Hields remarked. The report stresses that the path forward necessitates balancing the excitement for AI with a commitment to deeper research and development, or we risk leaving valuable innovations behind.

As the tech industry leans heavily into AI, investors and stakeholders alike must navigate this murky terrain with eyes wide open—or risk getting lost in the rush. The consensus is clear: while AI is undeniably here to stay, it must not come at the cost of innovation in other tech areas.

In summary, while the AI boom has led to a significant surge in investment and interest, it also raises critical concerns about sustainability and viability among many of the newly minted startups. The allure of large funding rounds has resulted in an influx of ‘zombiecorns’—companies that look good on paper but lack fundamental metrics for healthy growth. As the sector continues to evolve, a balance between capital directed at AI and support for other technological advancements is crucial to avoid stagnation and ensure meaningful innovation.

Original Source: www.itpro.com