The state of venture capital: Optimism is fading

The first quarter of 2025 started bright with optimism that the new administration’s friendliness toward mergers and the tech sector would boost exit activity and start the distribution flywheel spinning again. By the end of the quarter, though, trade uncertainty and the off-again-on-again tariff threats had tempered these hopes, as shown in the Q1 2025 Pitchbook NVCA Venture Monitor.

The trend that “it’s good to be big” continued: larger deals, funds, and exits dominated. A few large transactions hinted at a market rebound, but LPs and GPs both face challenges in the bifurcated landscape.

Fundraising, both in count and value, collapsed in Q1. Eighty-seven vehicles closed on a total of $10 billion, for the lowest average fund size ($117 million) since 2019. If these trends persist, 2025 will see the lowest fundraising activity in at least a decade. Dry powder stocks are close to $300 billion but have fallen in the slow fundraising environment. The median time between fundraises exceeded three years for the first time, and managers are doing their best to negotiate favorable deals to slow deployments and postpone going out to the current unfriendly market.

Liquidity-constrained LPs continue to back those GPs that have a strong record of distributions, creating an additional barrier for market entrants and for the start-ups that those new firms might fund.

Exit activity failed to support PitchBook’s earlier theory of a 2025 resurgence. Although Q1’s exit value of $56 billion (from 385 deals) was the highest since Q4 2021 and the annualized deal count (1,540) would have placed the year second only to 2021, the details cast shade on this sunny vision. Almost 40% of the value came from a single exit, the IPO of AI cloud company Coreweave, which turned in a rocky performance reflecting public wariness of loss-making startups. Only 12 companies were listed in Q1, and the glowing outlook for public listings that started the year has dimmed in light of current trade uncertainties. PitchBook has since revised its exit forecasts to 2024’s levels as companies such as Klarna and StubHub have paused their processes.

Not only have IPOs stayed stubbornly low, but trade buyers have targeted early-stage companies. Seed and pre-seed companies accounted for about 45% of Q1’s trade sales, higher than at any time in the past decade. As a result, prices (and the resulting distributions) tend to be low.

Finding liquidity is increasingly urgent to spark fundraising. Hopes that the new administration’s business-friendliness would boost M&A activity have subsided. Investors and acquirers are waiting for clear direction, which is not materializing.

Deal activity was strong in Q1. Deal counts, at 3,990, rose 11% from the last quarter, while the $91.5 million value set a post-Q1 2022 record, soaring 19% from Q4 2024. If the deal count trend persists for the year, 2025’s deal activity would rank third highest in the decade. The annualized deal value, if sustained, would set a new record. But–and there’s always a but–the total is skewed by OpenAI’s $40 billion round. Excluding that, 2025’s value would be on pace for the 4th-highest performance in the decade–perfectly adequate but hardly earth-shattering.

AI-related companies continue to bring in the lion’s share of funding–71% of Q1’s total value and almost half (48.5%) when removing the OpenAI transaction. The definition of an AI-related company has become fuzzy, though, as the most innovative applications now incorporate the technology (or say they do). Almost a year ago, Dan Primack of Axios commented: “It will become harder to separate out 'AI startups’ from all startups, much as the term ‘internet company’ lost all meaning” in the early 2000s.

Investment activity continues the “flight to quality” that’s been a watchword, focusing on larger, more advanced companies, while funding for smaller and younger startups has dropped to 36% of total value, the lowest in a decade. First-time rounds have fallen both on a quarterly and an annual basis. Recent market challenges–uncertain policies about tariffs, market volatility, and sinking consumer sentiment, for example–may hamper startup prospects, further challenging the VC industry.

Although 2025 started with bright hopes for deregulation and a favorable business climate, the recent chaos in the markets leaves the future uncertain. Until exit activity gets underway, fundraising will be constrained, and fund managers will likely cautiously deploy capital.