(Yicai) Oct. 22 -- Funding enthusiasm in the embodied artificial intelligence industry has cooled down to some extent in the second half of the year. Many Chinese yuan funds are now adopting a wait-and-see approach and are reluctant to take risks, an investor told Yicai.

At least 185 embodied artificial intelligence financing deals were completed in the third quarter, with a total funding amount of CNY33.3 billion (USD5 billion), much lower than the average of CNY46.8 billion in the first two quarters, according to data from Chinese venture capital market data provider ITjuzi.

The number of embodied intelligence projects backed by top venture capital firms has also declined. HSG Group participated in at least 20 financing rounds in the first half, while GL Ventures took part in no less than 18, according to incomplete statistics compiled by Yicai. But in the third quarter, the number of financing rounds they participated in dropped to eight and four, respectively.

Laurel Ventures now tracks fewer embodied intelligence projects than before, partner Wang Han told Yicai. “In the first half, when looking at embodied intelligence projects, we were always worried about missing the industry’s growth wave, and entrepreneurs would value their companies directly in line with leading players in the sector.”

But in the second half of the year, that concern disappeared because internal assessments suggested that the chance of many projects being approved for an initial public offering in the future was not as optimistic as before, Wang explained.

When target projects lack diversified exit channels, professional investment firms become more cautious about investing, said Shen Meng, executive director at Chanson Capital.

“The embodied intelligence sector was somewhat overheated before, and companies’ progress in technology and commercial development has clearly lagged behind their valuations,” an industry insider said, adding that he believes the bubbles accumulated earlier need to be cleared out. This is an important reason why the financing market has cooled, he pointed out.

“The cooling does not mean the boom is over,” Miao Tianyi, managing partner at Puzhuo Capital, told Yicai. “In fact, the approach of investment capital is shifting from broad and scattered to concentrated on top-tier, technically strong teams.” Industrial investors and leading large language model companies are selectively picking targets against the trend to make strategic deployments, he added.

The cooling in the second half indicates that bubbles are starting to be squeezed out after reaching their highest point, Miao believes. “Financing channels for small- and medium-sized projects that lack sustained self-financing capability are narrowing, and it is becoming increasingly difficult for them to survive independently,” he said.

A pickup in merger and acquisition activity is likely to become a major theme in the industry’s next phase, Miao predicted.

Editors: Tang Shihua, Futura Costaglione