At first glance, the global venture capital market appears to be booming.
Venture capital investment in Q1 2025 climbed to a 10-quarter high of $126.3 billion, rising from $118.7 billion in the previous three months, according to KPMG; some 35 Unicorn assets (start-ups valued at US$1 billion or more) were formed through the quarter, the second highest quarterly total since 2023, according to Pitchbook, and generative AI platform OpenAI landed a record setting US$40 billion funding round at the end of March.
These headline numbers, however, do not tell the full story. Overall venture investment may appear strong, but the asset class has not escaped the fallout from elevated inflation and interest rates, stock market volatility and global trade uncertainty.
Investment value is up, but venture capital deal volume is down. In Q1 2025 only 7,551 deals crossed the line, down from 8,801 deals in the previous quarter and a record quarterly low, according to KPMG. Meanwhile, a Bain & Co analysis shows a 23 percent year-on-year decline in venture capital fundraising, with Pitchbook recording a year-on-year decline in venture capital exit value, which totaled US$322.8 billion in 2024 versus US$331.2 billion in 2023.
A two-tier market
The gap between robust investment activity on the one hand, and falling fundraising and exit value on the other, reflects the emergence of a two-tier venture market that is bifurcating by sector and size.
Perhaps the starkest contrast to emerge is the widening disparity between the red-hot levels of deal activity involving AI-linked companies and start-ups in other sectors.
Indeed, close to a third of total funding round activity in Q1 2025 was generated by the mega OpenAI funding round, with large-language model AI start-up Anthropic another heavyweight contributor to headline numbers, landing a US$4.5 billion funding round raise. Other companies with specific AI-linked capabilities, including KoBold Metals, a developer of AI-powered mining exploration tools, and AI healthcare company Cera, were among the other high-profile performers.
The dominance of AI and machine learning has been such that it accounted for 57.9 percent of combined venture deal value – an all-time record share of the market, according to Pitchbook.
There have been a few other bright spots in the market, most notably in European defense-focused groups, with the Nato Innovation Fund and Dealroom recording a 24 percent rise in investment in European startups focused on developing defense and defense-related technology. Drone maker Tekever and defense software company Helsing have been among the big winners, as European governments and business ramp up defense spending in response to the ongoing Ukraine war.
Investors and dealmakers appear to be doubling down on select segments of the market, upping investment in these areas while putting investment in other areas on hold until macro-economic uncertainty abates. This is one of the main reasons for falling investment volume at time of rising investment value.
Fundraising falters
Macro-economic volatility has also impacted venture capital in a similar way to the buyout space, with volatility making it increasingly difficult to exit portfolio companies at attractive pricing, which then limits the distributions managers are able to make LPs, who in turn have to put the brakes on supporting new fundraising until managers start returning more cash to investors.
This dynamic has shaped what has been a tough fundraising market – which is expected to remain challenging in the near-term as a much anticipated “exit window” is pushed back yet again.
Venture dealmaker had entered 2025 with quite confidence that the year ahead would herald an improving environment for exits, with IPO markets (a crucial exit channel for venture-backed assets) set to reopen as inflation pressures eased and interest rates assumed a downward trajectory.
Escalating trade tension and tariff uncertainty, coupled ongoing conflict in Ukraine and the Middle East, and associated stock market volatility, however, have pushed back any optimism for a wave of exits back to the second half of 2025 at least, or even into 2026.
Venture-backed companies that have test the IPO waters have struggled to land successful listings at stable prices, while other venture portfolio assets that had been gearing up for big-ticket IPOs have delayed their prospective listings due to market uncertainty.
Exiting via funding rounds involving larger venture firms has also been testing, with Pitchbook noting that in the US – the world’s largest venture ecosystem – more than a quarter of funding rounds in Q1 2025 were flat or down rounds (where a start-up raises money at a lower valuation than in previous funding rounds).
There are signs that trade tariff dislocation may be abating, and stock markets have recovered losses from earlier in the year, laying a firmer foundation for potential exits through the second half of 2025. Markets, however, are still choppy, and it will take time for managers to build the necessary comfort to put companies on an exit pathway.
Opportunities ahead… but uncertainty lingers
Through this period of dislocation, opportunities to invest in high-quality, high-growth venture assets will continue to emerge. AI will more than likely continue to dominate deal activity, although defense and cybersecurity startups will also be high on dealmaker target lists.
Other sectors will also present compelling investment opportunity, although in smaller volumes, with cleantech and fintech the sectors outside of AI and defense that dealmakers are keeping an eye on.
Until there is a sense of wide macro-economic stability, however, the bifurcation theme that has shaped the venture investment during the last 12 months will continue to set the tone for market activity through the rest of 2025.
