VC Market Split: AI Dominates While Other Sectors Struggle

Editor
May 17
2 min read

What's New

PitchBook's Q1 2025 US VC Valuations and Returns Report reveals an unprecedented concentration of capital, with AI & machine learning companies capturing 71.1% of total VC investment value while representing just one-third of all deals. This bifurcated market shows AI continuing to command premium valuations while the broader venture ecosystem faces pressure.

Why It Matters

The extreme concentration of capital in AI threatens to starve other sectors of needed funding, potentially stifling innovation across diverse industries. Meanwhile, rising tariff tensions have pushed back the expected 2025 liquidity boost to 2026, creating additional fundraising challenges for startups and investors alike.

Big Picture Drivers

Tariffs are significantly altering market outlook, delaying liquidity events and creating pricing uncertainty that complicates fair market valuations.
Valuations continue rising in headline numbers, but this masks underlying weakness, with 26.2% of Q1 rounds being flat or down rounds - the highest proportion in over a decade.
Liquidity remains constrained as IPO activity stays tepid and exit value lags behind long-term trends, pushing the median time to IPO to 6.1 years.
Secondary markets show early strength with premiums returning, but benefits are concentrated among top startups while most companies struggle to find buyers.
Returns have finally turned positive after eight consecutive negative quarters, but may be short-lived without significant exit activity to generate distributions.

By The Numbers

71.1% of Q1 VC investment went to AI & ML companies
26.2% of rounds were flat or down rounds, highest in over a decade
1.2x median step-up for Series D+ startups, roughly half of 2021 peak rates
17.6% of deals were down rounds, up from 14.5% in 2024
6.1 years median time to IPO, longest since 2016

Key Trends to Watch

Distribution pressure will intensify as funds from 2015-2017 vintages approach their 10-year term with RVPIs still higher than DPIs, potentially forcing discounted liquidations.
Early-stage impact may worsen as funds raised in 2021-2022 draw down dry powder without the ability to replace it, extending capital constraints to earlier stages.
Acquisition dynamics are shifting toward earlier-stage targets, with 51.9% of venture-backed acquisitions occurring at seed stage or earlier - the highest in a decade.
Sector divergence between AI's premium valuations and other sectors may widen further if current semiconductor tariff exemptions become permanent policy.

The Wrap

The bifurcated VC market presents fundamentally different realities for AI companies versus everyone else. While AI firms enjoy continued premium valuations and concentrated investment, most startups face a challenging environment with rising down rounds, delayed exits, and limited liquidity options. Without significant improvement in exit conditions, this divergence will likely intensify through 2025.