SSTI review of Q1 2025 VC investment sees pipeline problems brewing for regional TBED goals

With Q1 2025 venture capital (VC) data stabilized and reports coming out on investment activity, it is a good time to review 2025 VC investment from a TBED perspective. Many published reports on VC activity include deals at the top end of the size range that—with individual transactions now reaching- billions of dollars—can swing some of the metrics and mask the underlying nuances facing smaller companies and markets. While investment levels are trending up, the totals are driven by mega deals and AI companies. Looking deeper into the numbers, there appears to be a broad shift away from smaller investments toward larger deals. This shift raises important questions for publicly supported innovation finance programs intended to close financing gaps and provide technical assistance that prepares companies for larger investments. 

A recent report from Carta highlights a few important data points for the TBED community. First, Carta notes an 18% uptick in seed round valuations, but a 28% slowdown in early stage deals and a 37% drop in funding totals. A similar trend was observed in Series A rounds with valuations up 9%, but a 10% decline in rounds. The report also highlights that B rounds in Q1 2025 came at a record 2.8 years after series A financing. Some of these results may be driven by the cyclical nature of VC investment and following from high levels of funding activity in 2021 and 2022.

Pitchbook points to similar trends and highlights some of what might be driving the numbers in a recent report. AI and machine learning companies raised over 71% of total VC dollars and represented 33% of all deals in Q1 2025. Deal sizes and valuations are up but largely driven by mega-size transactions and later-stage deals. Another potentially troubling indicator is that 26% of Q1 deals were down rounds, meaning that valuation for the individual companies fell. The report also points out that investment funds not in the current hot sector may have trouble raising capital and are likely to be running out of dry powder raised in 2021-2022.

The complete picture of what this means for companies outside the AI and machine learning space is not immediately clear, though it is unlikely to be a good sign of readily available capital on the horizon. The good news is that, even with down rounds, these are the companies that are surviving, for now. Still, it can also mean that investors outside of the AI space and smaller funds are retrenching and thinking about protecting their portfolios instead of making new investments. 

Innovation finance programs in regions feeling less-than-adequately served by private capital sources are typically targeting support for companies and transactions at the early stages of their development, where valuations and funding rounds are measured in millions, not billions of dollars. To provide a finer-grained look, we examined Pitchbook data for transactions less than $100 million to illuminate trends with greater relevance to TBED practitioners and the companies they support.

For deals of $100 million or less, the total number of deals (Figure 1) continues to trend down from the early 2022 peak. In total, Q1 2025 shows the lowest number of deals over the past 20 quarters, falling below Q2-Q4 2020 levels. Total dollars (Figure 2) experienced a faster decline after the peak and have remained relatively stable since the end of 2022, hovering around $20 billion per quarter, with a slight uptick from the end of 2024. 

Figure 1: VC investment activity under $1M

Figure 2: Total VC investment for deals under $100M

Both median investment size (Figure 3) and median pre-money valuation (Figure 4) continue the climb started at the beginning of 2024, though with some slowing of growth. Rising valuations and funding rounds can be a good sign for companies, though the trends here appear to be driven by the high end of the market. 

Figure 3: Median deal size for VC investment under $100 million

Figure 4: Pre-money valuation for VC deals under $100M

Taking a closer look at trends by deal size can identify how dollars and activity are moving within the spectrum of VC investments (Figures 5 & 6). What we see in Q4 2024 and Q1 2025 is a significant drop in deals and total dollars for transactions less than $500,000, reaching the lowest level of the prior 20 quarters. Metrics on deals north of $10 million are well below 2021-2022 peaks and seem to be holding close to numbers observed over the past 18-24 months, with dollars on a slightly rising trend over the past four quarters (Figure 5). Q1 2025 deals between $500,000 and $900,000 look more typical of the past 20 quarters outside of occasional spikes. Deals between $1 million and $10 million again show low levels of deals and dollars compared to peak levels. The number of deals between $5 million and $10 million show a slight uptick from Q4 2024, while the number of deals between $1 million and $5 million declined sharply from the prior quarter (Figure 6).

Figure 5: VC investment total by deal size range

Figure 6: VC investment activity by deal size range

Investment activity, however, does not tell the complete story. By examining the relative proportions of activity within each deal size segment, we can control for overall market volatility and see how investors and funding are shifting across the spectrum of small to large deals (Figures 7 & 8). What we find is that larger deals are taking on a larger share of activity over the past four quarters. The percentage of all deals in each quarter from investments exceeding $5 million is increasing. Interestingly, deals between $500,000 and $1 million show a slight uptick from Q4 2024 and are generally more stable than deals from $0 to $500,000 and from $1 million to $5 million. In aggregate, funding activity is shifting from smaller deals to larger ones. 

Figure 7: Percent of investment activity by deal size range

Figure 8: Percent of dollars invested by deal size range

The continuum and progression of VC investments from small early rounds to larger later-stage deals creates an interconnectedness in VC that allows ripple effects both up and down the investment stream. In this case, the movement toward AI and machine learning may be pulling LP funds and manager interest away from more traditional sectors. This pull of capital to a single sector and the accompanying movement of dollars to a more select group of mature and high-value companies is likely to have significant impacts on new companies and those entering niche markets or developing products with complex technology development or regulatory pathways. Companies in smaller geographic markets may also face risk as local investors see existing portfolios stall due to a lack of downstream funding. 

Within the economic development space, there are many high-potential companies that can bring significant employment and economic growth that may have difficulty raising funds. These companies may also have the potential to be lucrative investments, but fund managers may find that the size of the possible return is not enough to outweigh the risk. The looming possibility here is that companies outside of AI and machine learning may be viewed as “nice companies and good investments,” but not good enough for investors to stop chasing the Big Win in AI. 

The good news of increased investor interest in AI and machine learning is that new companies can come from anywhere. Starting an AI company does not require dedicated and expensive lab space or proximity to specialized markets or resources. The challenging truth of that democratization, however, is that the competition is both more prevalent and, particularly at the high end, much more well-established. 

Funding challenges for more traditional VC sectors and smaller markets also point to the importance of developing strong companies that can compete for limited resources. Companies that lack a strong business development team, a clear value proposition, and credible financial models are going to have a difficult time finding investor support. Similarly, companies that have already raised funds and have not tightened up their governance or that have a complex cap table could give investors an easy reason to walk away. Fortunately, these are areas where TBED organizations can add value to a company without much additional cash expense. 

The overall trend over the past 36 months is a slowing of investment activity with a simultaneous shift toward larger transactions. What this means for the TBED community may depend on the industry and geography, but it is likely that companies trying to raise less than $10 million, particularly from investors outside their immediate region, will face a more challenging funding environment. Because TBED and innovation finance programs tend to focus on earlier-stage companies, programs could face higher demand, and existing portfolios could see a variety of negative impacts as companies stall.

If the companies and investors you are working with are facing funding challenges, please reach out to SSTI <hagar@ssti.org>. We are interested in tracking these emerging issues, hearing of your concerns, and supporting the TBED community and innovation finance organizations to get ahead of rapidly shifting market conditions.