AI and defense sectors are monopolizing US venture capital funding, leaving non-specialized companies struggling to attract investment. Peter Hébert of Lux Capital notes a stark market split: firms offering AI or defense technologies face “endless demand,” while others battle for scraps. This divide reflects geopolitical tensions driving defense spending and AI’s transformative hype, with investors prioritizing rapid growth potential.

Startups outside these sectors must now “defend their existence” in an AI-centric ecosystem. Michelangelo Volpi of Hanabi Ventures warns companies like HR software providers must innovate to avoid being outpaced by AI-driven competitors. Even securing seed funding is challenging, as the “primordial soup of seed” expands while fewer firms raise large series A rounds. Tom Loverro of IVP highlights how post-seed transitions remain fraught, exacerbated by oversupply at the seed stage.

Economic headwinds compound the crisis. Rising US interest rates strain cash-strapped startups, while consumer affordability crises dampen spending. Titanium Tours’ Jesus Repetto cites term loan costs tied to Federal Reserve rates, despite his company’s 317% annual growth. Meanwhile, European defense investments surge amid Trump-era pressure, contrasting with stalled US consumer trends.

The AI gold rush shows no signs of abating. Allbirds’ dramatic pivot to AI infrastructure—rebranded as Newbird AI—sparked a 582% stock surge, illustrating investors’ appetite for AI narratives. Klarna’s pre-IPO AI rebranding, which raised $1.4bn, underscores how companies recast themselves to tap into funding flows. Until non-AI firms adapt, venture capital’s “good stuff” category remains dominated by defense and tech titans.