Investors argue that Nvidia's domination in manufacturing computer chips for artificial intelligence (AI) has cooled down venture funding for anticipated competitors, as US deals this quarter have fallen 80% compared to a year ago.

The California-based firm is topping the market for chips that are made to handle mass amounts of language data, and in a process called training, AI models accumulate intelligence by being exposed to more data.

With Nvidia gaining strength in that area, companies, mainly startups, are finding it harder to build competing chips. As these startups are viewed as a riskier bet, venture financiers are increasingly becoming unwilling to invest big - creating a chip design to a working prototype can reach $500 million.

Greg Reichow, a partner at Eclipse Ventures, told Reuters: "Nvidia’s continued dominance has put a really fine point on how hard it is to break into this market," adding: "This has resulted in a pullback in investment into these companies, or at least into many of them."

So far, US chip startups have raised $881.4 million as of the end of August, per PitchBook data, as opposed to the $1.79 billion for the first three quarters of 2022. The number of deals has dropped from 23 to 4 through the end of August.

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Beating the chip wave

AI chip startup Mythic, ran out of funds last year after having garnered about $160 million and was almost forced to stop operating, according to technology website The Register. However, a few months later, it was able to bring in almost a $13 million investment.

Mythic CEO Dave Rick believes that Nvidia "indirectly" contributed to AI chip fundraising enemies because investors want "Home run only type investments with a huge investment, huge return". He added that the harsh economic conditions have also added to that. 

Secluded startup Rivos, currently manufacturing chip designs for data servers, has been facing funding trouble according to two sources familiar with Rivos's standing. But a Rivos spokesperson claimed that Nvidia's dominance has not posed any impedance to funding efforts as its hardware and software "continues to excite our investors."

Rivos is currently caught up in a lawsuit with Apple, which has accused Rivos of stealing intellectual property.

Investors are also increasing their requirements for funding, including one that says companies must have a product within months of launch or already generating sales.

PitchBook analyst Brendan Burke provides data that about two years ago, new investments in chip startups ranged around $200 million or $300 million, and that has plunged to $100 million.

In spite of that, to fundraise $100 million back in August, Tenstorrent raved about CEO Jim Keller, who is considered an almost-legendary chip architect who has designed for Apple, Advanced Micro Devices, and Tesla. 

D-Matrix, with a projected revenue of less than $10 million this year, raised $110 million just last week, which was supported by financial backing from Microsoft and a commitment from Microsoft to test d-Matrix's new AI chip after launching next year. 

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However, startups in AI software and similar technologies are not caught in the wave of fundraising trouble as they garnered about $24 billion this year through August, according to PitchBook data.