Venture funding sees quarterly high, but labor market recovering

That may not signal a strong comeback, but there are signs of improvement. Countywide job cuts throughout are just a fraction of what they were the last two Januaries, with only two companies announcing layoffs that will impact more than 40 workers.

“The labor market is stable,” said Rosanne Foust, CEO of the San Mateo County Economic Development Association. “It has not gone up, and it has not gone down.”

The Bay Area also saw the highest levels of venture funding last quarter in years, reaching almost $37 billion, according to data from CB Insights, a nearly fivefold increase from the previous fourth quarters in 2022 and 2023. The number of deals was lower than previous quarters, signaling a concentration in mega-rounds, fewer early-stage rounds and a weak initial public offering market, CB Insights Managing Analyst Benjamin Lawrence said. 

“We’re seeing companies that otherwise would go public raise larger rounds instead and largely because the private markets are proving flush with capital and there's more of an appetite for it,” Lawrence said. “Why go public and deal with that burden from a federal financial reporting perspective when you can still say private? When you look at the companies in this space that are most likely to go public, they are AI companies and they are a few years away from reaching that point.”

The five largest venture deals in the region were all artificial intelligence-focused companies, such as Databricks, OpenAI and Anthropic. But the industry is in a bubble, Lawrence added, and there will soon be a bifurcation between firms that develop large language models and AI infrastructure, as opposed to those using AI to achieve other goals.

“At the core, a drug discovery company that uses AI is a drug discovery company. AI is a means to an end,” he said. 

Many life science firms do use AI for a variety of applications, and the county still houses the majority of firms who received the largest funding rounds last quarter, including Nuvig Therapeutics and Maze Therapeutics, though no life science funding round broke $200 million. Databricks and OpenAI saw $10 billion and $6 billion rounds, respectively.  

Firms like OpenAI and Anthropic have dominated the AI infrastructure market, the recent launch of China-based DeepSeek, which received a fraction of the funding received by U.S.-based competitors, will likely leave investors even more scrutinous. 

“Is it possible to see a short-term pull back or less free flowing money into these types of AI companies because of DeepSeek? Sure. Is it likely to completely change the trajectory alone? Quite possibly no, but it puts more emphasis on how much bang for your buck you are getting,” Lawrence said. 

San Mateo County still has yet to reap the full benefits of the AI funding boom. Most companies, particularly those focused on developing large language models, are concentrated in San Francisco or Santa Clara County, specifically Palo Alto. Some startups are emerging in Menlo Park, but the gap is stark. None of the top venture deals in the region went to county-based firms last quarter.

According to data from University of Maryland and LinkUp, the county saw about 920 newly posted AI jobs over the last two quarters, which is 15% and 20% of the new AI jobs in Santa Clara County and San Francisco, respectively. 

But the county’s ratio of AI to technology jobs is still comparable, or in some cases higher, than its neighboring counties. And some companies are starting to see the benefits of the Peninsula market. Last year AI firm Replit announced it was moving its headquarters to Foster City from San Francisco, with its CEO touting the better quality of life as a driving factor. 

“In San Francisco, you can get more cost effective office space. They have a 35 to 45% vacancy rate, so I’m sure the deals are there,” Foust said. “But if you want the quality of life, easy access to the airport, with Caltrain … vibrant downtowns, this is not a bad place to be at all. I think there are a lot of small, under-the-radar AI companies, and I expect to see more as well.”

alyse@smdailyjournal.com

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