Venture capital is screwed. A bubble in AI is their last hope, and they’re betting everything on Sam Altman. It’s heartwarming.
Today, we have the Pitchbook-NVCA Venture Monitor for Q1 2025. This is the National Venture Capital Association telling its members how things are going. It’s the view of VC from the inside. The front cover picture is the light at the end of the tunnel — and it’s an oncoming streetcar. [NVCA; NVCA, PDF]
We covered the Q3 2024 report last year. That one tried very hard to present bad news as okay news. The new report can’t even do that.
Here is the state of venture capital in early 2025:
- Venture capital is moribund except AI.
- AI is moribund except OpenAI.
- OpenAI is a weird scam that wants to burn money so fast it summons AI God.
- Nobody can cash out.
The report mostly blames venture’s woes on President Trump and his tariffs — but venture capital’s problems are systemic and you could see them coming since the zero-interest-rate era.
And they have no idea how to fix this. None at all. The report’s only plan for the future is to cross their fingers and hope.
Trump’s tariffs have trashed everything
The Trump economic disaster is the most important material fact for the venture capital sphere. The report goes on and on about the tariffs.
Here’s the first paragraph of the report:
With uncertainty dominating US financial markets throughout the first quarter, our prior expectation that 2025 would see a resurgence in venture capital (VC) liquidity and dealmaking has been dimmed. Should the latest iteration of tariffs stand, we expect significant pressure on fundraising and dealmaking in the near term as investors sit on the sidelines and wait for signs of market stabilization.
That is: nobody is doing deals because business can’t make plans past lunchtime.
The report somehow fails to mention the bit where the Silicon Valley VC and executive crowd worked their backsides off to elect Trump and several of them sat in the front row at his inauguration. Then they were actually surprised when the leopard ate their faces too.
The end of zero interest
VC is hilariously unable to cope with not being in a zero-interest-rate environment.
In 2008, the global financial crisis hit. Central banks use interest rates as the brakes on an economy, so they took the brakes off to make sure money kept flowing around. Interest rates went below 1%. And interest stayed near zero for over a decade. [St Louis Fed]
But zero interest meant that if you had to get returns — say, you’re a pension fund — then there weren’t a lot of places to invest. Venture capital was one place you could put money and get returns.
This meant a flood of money into startups, and that meant all sorts of ridiculous startups got funding. Businesses that lost money on every transaction. SoftBank was setting money on fire as fast as possible, ending in the disaster of WeWork.
Borrowing money was almost free as well. Why not load up on debt?
But then inflation came along, and the Fed put interest rates back up — and suddenly there was less money. Why put money into venture capital when you could get back 5% just buying Treasury bills?
Venture capitalists were around before 2008 — including a lot of the current guys! — but it’s like they completely forgot how to do anything without free money. The party’s over, and now it’s time for the hangover.
23 Comments
jmclnx
I guess it is time to do your homework and invest in real tangible products instead of trying to make a quick buck and get out before the company fails.
oli5679
It’s really easy to be cynical.
There is a big upside potential for high growth companies taking advantage of technology trends.
Today, Google’s revenue is £263.66 Billion. This is nearly 300x the revenue Google generated in 2003 ($961.9 million). The company went public on August 19, 2004, at $85 per share, valuing the company at $23 billion. After the IPO, Google reported $1.47 billion in revenue for fiscal year 2003, with a profit of $105.6 million.
etaioinshrdlu
Ignoring politics, which I think makes this article somewhat off-topic, I would argue with many of the points in this article – but just one would be that ZIRP specifically caused inflation and required higher interest rates.
The way I remember it, rates were already raised substantially, during the first Trump admin, not due to inflation, lowered again during COVID, and raised due to inflation, where a likely causative factor in the inflation being high government spending and stimulus.
A_D_E_P_T
> Here is the state of venture capital in early 2025: Venture capital is moribund except AI. AI is moribund except OpenAI. OpenAI is a weird scam that wants to burn money so fast it summons AI God. Nobody can cash out.
The interesting thing, to me, is how speculative OpenAI's bet is.
IIRC it was 2019 when I tinkered with the versions of GPT 2.0 that had web interfaces, and they were interesting toys. Then I began using ChatGPT since its launch, which was around Dec 2022, and that was a profound paradigm shift. It showed real emergent behavior and it was capable of very interesting things.
2019 – 2022 was three years. No hype, no trillions of dollars invested, but tremendous progress.
Now, there has been progress in the part ~three years in synthetic benchmarks, but the feeling with ChatGPT 4.5 today is still the same as it was with GPT-3/GPT-4 in 2022. 4.5/o3 doesn't seem hugely more intelligent then 3.0 — it hallucinates less, and it's capable of running web searches and doing directed research — but it's no paradigm shift. If things keep progressing the way they're going, we'll get better interfaces and more tools, but it's far from clear that superintelligence (more-than-human insight, skill, and inventiveness,) is even possible with LLMs.
Herring
I think the problem is businesses are tiny little fascist dictatorships. They are always trying to pay less taxes, evade regulations, layoff workers, monopolize, destroy competitors etc. This is their first time ever having to think about the public sphere, or common good, or government, or democracy, or rule of law. They suck at that, it goes against all their training and instincts.
drdrek
I've got AI fatigue as the next guy, but this is over correcting.
VC money is in a constant state of FOMO, this is nothing new. Companies dress up as AI, or web3 or web2, or fintech or what ever to more easily attract capital. If 57.9% of dollars went to AI startups this year is not because everything is AI, I would bet 25% are just companies that tacked AI on to an unrelated business model and its skewing the statistics. I'll promise you that 10 years from now 57.9% of VC funding is going to be in some other buzzword and its not going to be AI.
mapt
> The report somehow fails to mention the bit where the Silicon Valley VC and executive crowd worked their backsides off to elect Trump and several of them sat in the front row at his inauguration. Then they were actually surprised when the leopard ate their faces too.
Many of these people are still running the Trump Administration from the shadows. Elon Musk turns out to just be one example of the billionaire to right wing brainrot lunatic infohazard funnel.
It mentions the Semafor story. Here's Adam Conover covering that – https://youtu.be/3_PKKUFxRyk?feature=shared
jparishy
IMO the best innovations tend to happen when someone has their hands bound and has no other choices but to figure out a new way or die. Now seems like an incredible time for new models and startup paradigms.
To me I think VC's figured out a way to market a very specific way to build companies and convinced a lot of people it's the only way for 20-ish years. Then there was this sort of shift to selling to enterprise, I think because B2C got harder and easy money was the goal. By then a lot of enterprise design makers were probably in the networks of the people selling. There's a meme about YC-of-late being mostly companies that sell shovels to each other.
But when you optimize for enterprise, I think you end up losing a lot of diversity of opinion in where the value comes from, which leads to top-heavy companies.
My main issue is that after the ZIRP era I don't believe the money is gone or unavailable. It just seems to be hoarded for some reason. There is astronomical wealth out there that could be used for trying new economic models that compete with the last generation of VCs. But it isn't happening.
Maybe the next era of VC decision makers, the ones who themselves were funded on big bets, just don't have the same appetite for risk? Or maybe the era of "developing your brand" has made them not want to share their success? I'm not sure but it's weird to me.
jeffreyrogers
It's a little hard to say for sure because companies can stay private longer and in some cases don't need to go public at all, but it seems that the last wave of huge successes were founded pre-2015 and since then the industry has been looking for the next wave, first with crypto, now with AI, and there are some tentative pushes into manufacturing/defense.
AI actually seems like a great fit for the VC business model, much more so than most SaaS companies are. Successes are likely to make a ton of money and they can't self finance or finance with debt because they need to spend a huge amount of money.
enahs-sf
The article somehow misses the mark on how VC firms actually make money apart from carry, its management fees. Thus, a16z raising a 20b fund on 3% management fee and 30% carry effectively guarantees them 600M even if the fund goes to zero and they have many such funds.
Sure, they would prefer to make money through carry, but the management fee is a nice downside protection.
jgalt212
ZIRP is gone for sure, but most of the $7T the Fed printed during COVID and the $3.5T the Fed printed post-GFC remains (net +8T). For this reason, I believe the era of VC-driven nonsense is far from over. A simple example is that stonks have recovered all of almost of all the post Liberation Day losses. This excess cash / Helicopter Money for the investor class has to go somewhere.
https://fred.stlouisfed.org/series/WALCL
vessenes
This is so wrong as to be almost laughable. My VC friends are working double shifts on financing companies that are disrupting nearly every market vertical. There’s almost an infinite greenfield out there right now.
Quick example : a company founded in the last three or four months that provides appointment setting and calendar management for a single healthcare vertical. They are already profitable. There are at least 5,000 market verticals like this in the US alone.
Tech to provide this is going to keep commodifying and that will leave early entrants as wealthy incumbents; journalism telling people to be certain that the opposite will happen is borderline irresponsible and certainly missing the situation full stop.
asdev
the expected value of their AI bets panning out is so high that they're obligated to make those bets
TrapLord_Rhodo
I agree with the article in faith, but i think they've gotten the cause wrong.
The problem is, scaling was ALWAYS the hard part. at a certain level, you don't have to worry about sharding and replicating databases, moving over to NoSQL, async race conditions, etc. etc. Why bet the house on one business idea, when you can have 10 "Micro-SaaS's" that are all bootstrapped but might make 10-20k in MRR.
In the day and age where the average business person has like 20-30 subscriptions for random tools, emails, websites, marketing, email lists, automations, SaaS products, freelancers, etc. it very much lends itself to the micro model.
The 'VC' business model is starting to break down. Just by looking around youtube and Indie Hackers, most of the successful businesses now adays are bootstrapped where the founder has some kind of community where they blog, youtube, have a patreon, X, etc.. They become the brand and they have no use for VC's. As soon as they launch a new app idea, they have 200K people on twitter, 150k people on youtube that will atleast give the app a look.
sonicgear1
I can't wait for the downfall of AI. It has become like a plague at this point.
Beltiras
Same as it ever was.
999900000999
Is it too late for me to pitch my AI driven startup that just takes a very common application ( task management) and adds some API calls to LLMs ?
Can I apply for YC again and get my annual rejection? So I can cry upper middle class tears.
I really need a business partner to keep me focused on features people actually want.
But my main business friend is focused on much more important things ( raising a new family) now.
Thinking about what's more important right now, making some games I know will make no money.
Creating a B2B startup that will also make no money.
ghaff
Anecdote != data of course but I've had multiple VCs reach out to me looking for funding and one angel investor I talked to complain about the dire situation with exits.
culebron21
I've noticed AI evangelists — those 2nd tier experts, who're not on every show and youtube channel, but do consulting and once in a while appear here and there — jumped on the hype wagon 1.5-2 years ago.
They'd pedal FOMO and would promise eldorado to everyone who joins. "AI will do everything for you, you'll be fired."
Now I see them change the tone. It's like: "c'mon, it's a special tool, you need to use it properly, and give it what it needs."
They sell quickly made courses. Same guys who in '12 would advertize "Mobile strategies" consulting (remember that thing here on HN?), then AR with Google glass in '14, then crypto in '17, then web3, and so on.
yhoots
Very funny that people will buy entire domains to spout Reddit-brained anti-tech takes. Same ppl who said crypto will go to zero and self driving cars will never work.
Yes many AI companies will go to zero. This is how every tech bubble works and innovation happens by ppl trying stuff and mostly failing. But in the end the survivors will remake the world for the better. Very sad to see this sort of drivel being popular here.
jay-barronville
Another thing I’ve observed for a while now (i.e., since everyone became obsessed with LLMs) is that a lot of founders nowadays—particularly at the pre-seed and seed stages—seem to view raising venture capital as a one-and-done type of thing.
I’m not exactly sure how prevalent this mindset is, but I’ve talked with lots of founders within the past couple of years and I’ve encountered this mindset a lot, which, to me, is a huge contrast to the mindset I encountered, e.g., about ten years ago when I was a young founder and I was raising a small round (mostly from angels)—back then, it seemed like every single founder was chasing venture capital non-stop and usually was already thinking about their next round before even closing their current round.
If this mindset is (or becomes) prevalent, unless a lot of these startups are quickly acquired for large sums, is venture capital, as it currently exists, ready to deal with this shift?
jimbob45
I’m to believe cultured meat wouldn’t also hit a VC lottery ticket? Or the right mRNA vaccine?
RainyDayTmrw
I'm not sure where this originated. During the software boom of the mid-2010s, someone told me that the vast majority of venture capitalists are lemmings[1]. That idea is as true as it ever was, and perhaps even more so in today's time of AI.
[1] Implying that they blindly follow anything and everything. The origin of this metaphor has since been debunked, but the metaphor itself lives on. https://www.adfg.alaska.gov/index.cfm?adfg=wildlifenews.view…