Derek Smith remembers the rose-colored dot-com era, when you could “sneeze an idea and someone would write a check for it.”

The early-stage businesses Smith guides to profitability through his Marina Del Rey-based startup accelerator, Plug In Ventures, know that world is long gone.

In the late 1990s, venture capital firms raced to back internet concepts with little more than a pitch deck to show. Funds tightened as the bubble burst, and early-stage investing remained disciplined until a short-lived, pandemic-time boom spurred by abundant liquidity and low interest rates.

Today, entrepreneurs vying for capital to grow and scale face as competitive a funding environment as ever.

For one, the cash that feeds venture capital firms isn’t flowing like it did a few years ago, with the number of new funds closing in 2025 hitting a decade low, according to a PitchBook report. A dearth of lucrative go-public deals and acquisitions has left less money to reinvest, and higher interest rates have made safer investments more appealing.

In large part, the scarce capital that is available streams in the direction of the uber-hungry artificial intelligence machine. Not only has AI eaten a good chunk of smaller software-based businesses, but it also represented 65.4% of last year’s venture capital deal value, or $3.3 trillion, the PitchBook report showed.

The AI firms raking in blockbuster investment deals are primarily large, late-stage industry leaders — leaving companies earlier in their development to fight tooth-and-nail for funding, Smith said.

“The big AI monsters are raising so much capital, it’s all clustering in a smaller number of companies versus being spread out across the entire stage chain of companies,” he said.

Amid fierce competition, pre-seed companies — early-stage startups working on validating an idea and building a product — have more to prove. Patience is fading among some investors, who expect to see a growing degree of traction, including a launched product or even revenue, before committing dollars, Smith said.

“People want microwavable outcomes,” he said. “They want a return in two to three years, so it’s a safer bet to concentrate your money into one of the bigger players in this space.”

To build momentum and evidence of their potential success, founders enroll in accelerator programs, which offer mentorship and connections to grants and investors.

Plug In, which has worked with entrepreneurs from underserved backgrounds for about a decade, launched a pre-seed track two years ago focused on the specific needs of companies just starting out.

The program, which currently enrolls roughly 70 businesses, has graduated a handful of cohorts already — but Smith has noticed that pushing through to seed fundraising has been increasingly challenging.

“The past three quarters, founders seem to be taking a longer time to raise capital,” he said. “Some founders are having to pivot and put the startup dream on hold for economic reasons.”

Investors’ great expectations

One startup that’s seen the funding challenge first-hand is WePair Health, an AI-powered training and career platform freshly out of Smith’s accelerator.

Founder Lauren Vivian, a physician by training, sought to build a one-stop-shop for community health workers and doulas to access training, match with jobs, and submit documentation for Medicare and Medicaid reimbursement.

Value would come from partnerships with managed care plans and public health departments, which could buy access to participating workers’ field notes for help in resource delegation and decision-making.

Grant funding helped WePair reach key early milestones, including building its web platform and mobile app. But securing contracts has been a heavy lift requiring a constant pipeline of trained worker sign-ups — a snag for pitching to investors hoping to see an up-and-running revenue stream.

“What we quickly saw was … there was always more of a requirement to have customers, to have more touch points,” Vivian said.

The hurdle sent Vivian’s team back to the drawing board. They resolved to home in on training prospective workers who might soon contribute to WePair’s intelligence-gathering tool, which will use AI to summarize workers’ input.

Even seasoned entrepreneurs like Ade Adesanya, who thought his prior experience building a scalable company would give him a leg- up in fundraising for his newest venture, are hitting unexpected walls.

After spending 15 years in L.A.’s startup world growing the business he launched as a graduate student at USC, Adesanya co-founded CleanCut Health to boost community health engagement.

The company runs an AI copilot to help hospitals design campaigns that drive preventative care visit sign-ups — a tech-forward focus his team has played up in hopes of attracting capital. But the bulk of investor attention shines on native AI products, Adesanya said, narrowing CleanCut’s pool of potential backers.

“The market is kind of really focused on AI, and sometimes that could be at the detriment of other problems that need to be solved,” said Adesanya, who hopes to raise $2 million for his bootstrapped startup.

A double-edged sword

Without a doubt, AI is “taking up a lot of oxygen in the room,” said Austin Clements, co-founder and managing partner at Slauson & Co., an early-stage venture capital firm based in View Park-Windsor Hills.

The companies behind foundational AI models and specialized “physical AI” hardware are sucking up dollars and attention in capital-intensive mega-rounds. OpenAI, Anthrophic and Waymo were responsible for 83% of the venture dollars raised in February, according to Crunchbase.

But for scrappy, young startups with small teams, the technology can also deliver a boost. AI tools are giving startups the opportunity to build out at record speed, Clements said, and deliver the results investors want to see.

“Before, you had to build out a large team of software developers to essentially get anywhere,” Clements said.

“(AI has) accelerated a lot of production of product, which in turn translates to more revenue, a faster go-to-market and faster expansion.” Kwamane Liddell, founder of health care startup ThriveLink, said a playing field leveled by AI tools allowed him to compete as a budding entrepreneur.

Taking his experience as a traveling nurse and hospital system director, Liddell built a platform that uses voice-activated AI social workers to help low-income, older or disabled patients access medication and treatment.

Putting AI to work writing code, ThriveLink has scaled to the formula investors want to see — “undeniable revenue, undeniable customers, undeniable product,” in Liddell’s words. Since its January 2024 launch, the company has raised $1.7 million from various venture capital firms, including Slauson & Co., and has generated revenue of $1.4 million.

“We can create teams and grow just as fast as anyone else,” Liddell said. “We’ve been able to do with half a million dollars in investment what used to cost $10 million.”

Lower barriers to entry go head-to-head with a tight capital environment. From Clements’ front-row view, this looks like a rise in the number of startups knocking on his firm’s door — but the founders seeking capital increasingly come from backgrounds specialized to their product’s mission, he said.

They also bring a higher level of intentionality to their pitches compared to the time when capital flowed more freely.

“It’s people that have been working on this issue or this challenge for years, and they and they’re translating it into something — not just like, ‘Oh, I have an idea and let me go out and try to see if I could raise money for it,’” Clements said. “There’s less tourism in entrepreneurship than there was in 2021.”

Among the thousands of businesses Clements’ team reviews every year, of which roughly eight to 10 win the firm’s investment, AI integration is a throughline. A lion’s share of the pitches the firm fields offer AI-driven solutions for a diverse range of industries.

Centering the technology is no longer a differentiating factor, the investor said, but a given.

The businesses in Plug In’s pre-seed accelerator hear this message loud and clear.

“We’ve seen the impact of not really being at the center of AI trickle down and really hurt and impact and inhibit early-stage startups,” Smith said. “What we’re telling founders is, ‘If you aren’t thinking about how AI is a central core piece to your business, you’re going to be in trouble.’”

Defensibility is key

The challenge is, for businesses hoping for long-term success and growth, building around AI use isn’t enough.

At a time when virtually anyone — including industry giants — can pick up an idea and harness AI to develop a similar or better product, defensibility means survival.

Protecting against competitors as an early-stage founder could include ensuring their startup has superior distribution, scales rapidly and grows brand momentum.

In an AI-dominated landscape, proving substance behind the technology is critical, Clements said.

“You want something that would even sound compelling without AI, but AI enhances your ability to execute against that product or that strategy,” he said.

Maia Modeste, founder of personal finance app Kirabo Equity, said she is “leaning into our community as our defensibility.”

As Modeste developed her app, she realized she couldn’t rely on the product itself, which forefronts AI-based customization to help users manage money, to build reliable traction.

Kirabo evolved to have a stronger wellness component, bolstered by an experiential marketing campaign that combines financial literacy education with activities like yoga at interactive, in-person activations.

“The idea is that these fun, engaging financial wellness events really set us apart, because ultimately, once Kirabo is in the world, anyone can use AI and provide more or less the same service to users,” Modeste said.

Growth sans venture capital

While securing venture capital funding is the ultimate goal for many tech-enabled startups, investors’ high profitability standards put some businesses out of the running.

But success doesn’t necessitate venture backing. Just ask Leonard Tatum, a computer scientist and co-founder of

Tatum Games, which pioneers solutions for game developers’ pain points in mobile analytics and advertising.

The company’s first product, mobile analytics platform MIKROS, reported strong customer numbers after its 2023 launch. Angel investors put up $785,000 for further development, and Tatum thought venture capital funding might follow.

After pitching far and wide, it became clear that investors’ desired metrics were out of reach, at least for a few years.

“If it’s the case that we hit seven figures in (annual recurring revenue), that’s when investors want to come because it’s proven that the infrastructure works,” Tatum said. “I’ve literally reached out to 3,000, 4000 VCs, and they’ve all rejected me.”

Paradoxically, Tatum Games is coming close to hitting that revenue figure this year — but it’s already built and scaled the products driving its success. Today, the company services more than 30,000 game developers and studios. It even rakes in enough to fund Tatum Tech, a growing community development program in South L.A. that exposes kids from marginalized backgrounds to game development and coding.

“We’re not pursuing any investments at this point,” Tatum said. “We’re self-sufficient.”