Tariffs and Global Uncertainty Offset AI and Infrastructure Spending

A Quarterly Wink and a Glance at Venture Capital

The exit market for VC-backed companies is beginning to show evidence of a rebound in Q3. There were some significant IPOs during the quarter. However, IPO activity for the first nine months of 2025 was subdued, with the number of VC-backed IPOs comparable to other post-pandemic years. Exit activity for VC-backed companies has been robust through the first three quarters of 2025, and 2025 might see the most completed exits since 2021. However, there are reasons to be guardedly optimistic as evidenced by 75% of the acquisitions in 2025 of VC-backed companies involved Series A round companies. Many of these companies, while profitable, could not maintain the high growth required by VCs and had to pursue alternative strategies, which often involved a buyout by a private equity firm.

VC Dollars Invested in 2025 Already Better Than 2022-24

VCs invested $80.9 billion in 4,208 transactions in Q3 2025. For the first nine months of 2025, $250.2 billion was invested in 12,000-plus deals, which already exceed the VC dollars invested in 2022, 2023, and 2024. AI and machine learning (ML) companies continue to attract the most VC dollars; in the first three quarters of 2025, they accounted for more than 64% of the venture dollars invested and approximately 38% of the deal count. There seems to be a real divide in the VC sector. AI companies are easily attracting most of the dollars, while founders of non-AI/ML companies are struggling to find capital as the liquidity crunch continues.

Pre-Money Valuations Continue to Climb

Due to continued softness in the IPO market, many VC-backed companies that cannot find buyers are staying private longer. In fact, the current value of all VC-backed unicorn companies now exceeds $3.7 trillion, a historic high. Thus far in 2025, median deal sizes for all series have increased compared to 2024. Median deal sizes for the first nine months of 2025 for pre-seed, seed, Series A, Series B, Series C, Series D, and beyond were $0.5 million, $3.8 million, $14.0 million, $32.4 million, $56.5 million, and $100 million, respectively. Median pre-money valuations have also increased at every stage. For the first nine months of 2025, median pre-money valuations at the pre-seed, seed, Series A, Series B, Series C, Series D, and beyond were $7.7 million, $15.8 million, $46.5 million, $133.2 million, $307 million, and $838.8 million, respectively.

Bay Area Startups Attract the Most Capital

Silicon Valley continues to attract the most VC dollars. In Q3, 648 Silicon Valley startups raised $44 billion. The next two largest geographies for VC dollars invested were New York City ($9.6 billion) and Boston ($4.4 billion).

FOMO a Factor in AI

Through Q3, more than $160 billion was invested in AI/ML companies. This already represents a record year for VC investment in the AI space, and we may only be in the early stages. AI-related valuations are going off the charts. The average valuation of an AI company in 2024 was $379 million; in 2025, the average valuation is almost $1.1 billion. There are not too many investors who want to forgo that level of appreciation. 

Exit Activity Has Strongest Quarter Since 2021

There were 362 exits of VC-backed companies in Q3 totaling $74.5 billion. This was the best quarter for exits since Q4 2021. Furthermore, there were seven IPOs of VC-backed unicorn companies during Q3. While good news, this was no better or worse than IPO levels seen earlier in the year. The number of VC backed IPOs seems to be at similar levels to other post-pandemic years.

Since the COVID years, there has been a change in how the public markets look at IPO candidates. During that era, growth was the most important variable for VC-backed companies considering a public offering. Today, successful IPO companies must be profitable or able to demonstrate a clear path to profitability. Most late-stage startups need to focus not only on growth but profitable growth.

The Liquidity Crunch Is Impacting VC Fundraising

Without a significant return of capital to limited partners, VC fundraising will remain weak. For the first three quarters of 2025, 376 funds raised only $45.7 billion. This compares unfavorably to the $85.7 billion and $103.5 billion raised in 2024 and 2023, respectively. Unfortunately, 2025 is on track to be the worst VC fundraising year since 2017.

It should not come as surprise that dry powder now stands at a record $311.2 billion. Approximately 30% of this dry powder is from 2022 funds and later. General partners continue to reserve more capital for follow-on rounds and additional portfolio support.

Going Forward

An investment boom in AI, infrastructure, and data centers is doing much to keep the VC sector relevant, despite continued issues with tariffs, interest rates, and geopolitical volatility. VC dollars invested, IPOs, and exit activity are beginning to show positive signs for future activity. The value of VC-backed unicorns (which now exceed $3.7 trillion) will not hinder profitable companies seeking an IPO. Exits attributable to later-stage VC-backed companies will go a long way to ease the liquidity crunch and return needed capital to limited partners. Hopefully, 2025 will conclude on a high note and be a bellwether of what we can expect from the VC sector in 2026.