derek smith It reminds me of the rosy days of dot-com, when you could sneeze at an idea and someone would write you a check for it.
Mr. Smith guides early-stage businesses to profitability through his Marina del Rey-based startup accelerator. plug-in venturesknow that the world is long gone.
In the late 1990s, venture capital firms raced to push the Internet concept with little presentation material to present. Money was tight after the bubble burst, and early-stage investing remained disciplined until a brief pandemic-era boom brought on by abundant liquidity and low interest rates.
Today, entrepreneurs vying for capital to grow and scale face a more competitive funding environment than ever before.
First, the money funding venture capital firms isn’t flowing like it did a few years ago, with one study showing the number of new funds closing in 2025 is the lowest in a decade. pitch book Report. A lack of lucrative public deals and acquisitions has left less money available for reinvestment, and rising interest rates have made safer investments more attractive.
Most of the time, available scarce capital is flowing in the direction of very hungry artificial intelligence machines. Not only is AI eating into a significant portion of software-based small business, it also accounted for 65.4% of venture capital deals last year, or $3.3 trillion, according to a report from PitchBook.
The AI companies attracting large investment deals are primarily large, late-stage industry leaders, forcing companies to fight tooth and nail for funding early in their development, Smith said.
“The big AI monster is attracting so much money, and it’s all concentrated in a small number of companies rather than being spread out across companies in the stage chain,” he said.
Amidst fierce competition, pre-seed companies (early-stage startups working to validate ideas and build products) still have a lot to prove. Smith said patience is wearing thin among some investors, who are hoping for increased traction, including product launches and even revenue, before committing money.
“People want microwaveable results,” he said. “They want returns in two to three years, so it’s safer to focus their money on one of the big players in this space.”
To build momentum and evidence of potential success, founders enroll in accelerator programs that provide mentorship and connections to grants and investors.
Plug In has been working with entrepreneurs from underserved backgrounds for about a decade, but two years ago it launched a pre-seed track focused on the specific needs of companies just starting out.
The program, which currently has around 70 companies enrolled, has already graduated a few groups, but Smith is finding it increasingly difficult to move on to seed funding.
“Over the past three quarters, founders seem to be taking longer to raise money,” he said. “Some founders have to pivot and put their startup dreams on hold for financial reasons.”
Investors’ high expectations
Here are some startups that have seen funding challenges: wepair health statusa new AI-powered training and career platform from Smith’s Accelerator.
founder Lauren vivianA physician by training, he sought to create a one-stop shop where community health workers and doulas could be trained, matched with jobs, and filed for Medicare and Medicaid reimbursement.
Value comes from partnerships with managed care plans and public health departments, where access to participating workers’ field notes can be purchased to aid in resource delegation and decision-making.
The grant funding enabled WePair to achieve important early milestones, including building a web platform and mobile app. But securing contracts requires an ongoing enrollment pipeline of trained employees, an obstacle to pitching to investors looking for a steady revenue stream.
“What we quickly learned was that there was always a need to acquire customers and have more touchpoints,” Vivian said.
This hurdle sent Vivian’s team back to square one. They decided to focus on training future workers who could soon contribute to WePair’s information collection tool, which uses AI to summarize worker opinions.
Even experienced entrepreneurs Ade AdeSanyaHe thought his experience building scalable companies would give him an advantage in raising capital for his latest venture, but he’s hit an unexpected wall.
I started it as a graduate student after growing my business for 15 years in the LA startup world. University of Southern Californiaco-founder of Adesanya clean cut health Promote community health initiatives.
The company operates an AI co-pilot that helps hospitals design campaigns that drive registration for preventive care visits. This is something his team is focusing on technology in hopes of attracting funding. But most of the investor attention has gone to native AI products, narrowing CleanCut’s pool of potential backers, Adesanya said.
“The market is very focused on AI in some ways, but sometimes it can be detrimental to other problems that need to be solved,” said Adesanya, who hopes to raise $2 million for his startup.
double edged sword
Without a doubt, AI is “consuming a lot of the oxygen in the room.” Austin Clementsco-founder and managing partner of Slawson & Co., Ltd.an early stage venture capital firm based in View Park Windsor Hills.
Companies developing fundamental AI models and specialized “physical AI” hardware are siphoning off funding and attention in capital-intensive mega-rounds. OpenAI, anthrofic and waymo According to the company, it accounted for 83% of the venture funding raised in February. crunch base.
But for finicky young startups with small teams, the technology could also be a boost. Clements said AI tools are giving startups the opportunity to build businesses in record time and deliver the results investors want.
“Before, you basically had to build a large software development team to go anywhere,” Clements said.
“[AI]accelerates the production of many products, which in turn leads to increased revenue, faster time to market, and faster expansion.” Kwamane Liddellfounder of a healthcare startup Thrive linksaid that the level playing field leveled by AI tools has allowed him to compete as a budding entrepreneur.
Liddell leveraged her experience as a traveling nurse and hospital system director to build a platform that uses voice-activated AI social workers to help low-income, elderly, and disabled patients access medications and treatments.
By writing code to AI and making it work, ThriveLink has scaled up to the formula investors want: “Undeniable revenue, undeniable customers, undeniable product,” in Liddell’s words. Since its founding in January 2024, the company has raised $1.7 million from various venture capital firms, including Slauson & Co., and generated revenue of $1.4 million.
“We can build a team and grow as fast as anyone else,” Liddell says. “We were able to make an investment that used to cost $10 million for $500,000.”
Lower barriers to entry are matched by a tighter capital environment. From Clements’ front row seat, this looks like a growing number of startups knocking on his company’s door, but he said founders seeking capital increasingly have backgrounds specific to their product’s mission.
They also bring a higher level of intentionality to their pitches compared to when capital flowed more freely.
“It’s people who have been working on this problem and this challenge for years, and they’re translating it into something. It’s not just, ‘I have an idea, let me see if I can raise some money,'” Clements said. “Compared to 2021, entrepreneurship tourism is down.”
Of the thousands of businesses that Clements’ team reviews each year, roughly eight to 10 receive investment from the firm, with AI integration being a key line. The majority of the company’s verticals provide AI-powered solutions for a variety of industries.
The investor said being technology-centric is no longer a differentiator, but a given.
Companies participating in Plug In’s pre-seed accelerator hear this message loud and clear.
“We’ve actually seen the effects of not being at the center of AI trickle down and really hurt, impact, and inhibit early-stage startups,” Smith said. “What we’re telling founders is, ‘If you’re not thinking about how AI is an important part of your business, you’re going to be in trouble.'”
Defense is the key
The challenge is that for companies that want long-term success and growth, building around the use of AI is not enough.
In an era where virtually anyone, including industry giants, can come up with an idea and leverage AI to develop an equal or better product, being defensive means surviving.
Protecting yourself from competitors as an early-stage founder can include ensuring your startup has good distribution, scaling quickly, and building brand momentum.
In an AI-dominated landscape, Clements said it is important to prove the substance behind the technology.
“You need something that would be compelling without AI, but AI will enhance your ability to execute that product or strategy,” he said.
Maia Modestefounder of the personal finance app Kirabo Equityshe said, “sheltering in our communities as our defensive force.”
As Modeste developed the app, he realized that he couldn’t rely on the product itself, which has AI-based customization at the forefront to help users manage their finances, to build reliable traction.
Kirabo has evolved to have a stronger wellness component, powered by an experiential marketing campaign that combines financial literacy education with activities such as yoga in interactive, in-person activations.
“The idea is that fun and engaging financial wellness events like this will set us apart, because once Kirabo is out there, eventually everyone will be able to use AI to provide more or less the same services to their users,” Modeste said.
Growth without venture capital
Securing venture capital funding is the ultimate goal for many technology startups, but investors’ high profitability standards keep some companies out of business.
But you don’t need venture backing to succeed. Please listen to me for a moment leonard tatumis a computer scientist and co-founder of .
tatum gameis pioneering solutions to game developer challenges in mobile analytics and advertising.
The company’s first product, the mobile analytics platform MIKROS, reported strong customer numbers after its launch in 2023. Angel investors put in $785,000 for further development, and Tatum thought venture capital funding might follow.
After extensive proposals, it became clear that the metrics investors wanted were out of reach for at least a few years.
“If you hit seven digits (in annual recurring revenue), that’s when investors want to come because you’ve proven your infrastructure is working,” Tatum said. “We literally reached out to 3,000, 4,000 VCs and they all turned us down.”
Paradoxically, Tatum Games is approaching that revenue figure this year. But the company has already built and expanded the products that drive its success. The company currently serves over 30,000 game developers and studios. It even raises enough revenue to fund Tatum Tech, a growing community development program in South Los Angeles that exposes kids from marginalized backgrounds to game development and coding.
“We are not making any investments at this time,” Tatum said. “We are self-sufficient.”
