Can startups generate a competitive advantage with AI tools?

We examine how generative AI adoption affects the venture performance of high-tech software startups. Using a matched sample, we find that startups using generative AI for product development raise 15% less funding, especially in competitive markets with many similar AI adopters. However, startups targeting broad markets raise 30% more funding when adopting generative AI early-within six months of its release-before a dominant design emerges. These findings suggest that while early AI adoption can be beneficial, widespread use may erode differentiation. Overall, generative AI is not a silver bullet and may hinder fundraising when competitive advantages are easily replicated.