Quarter Starts with Tariffs, Ends with Some Welcome High-Profile Exits

With respect to VC activity, Q2 2025 finally began to show some signs of improvement. The quarter started with President Trump’s tariff announcements, creating more uncertainty, and ended with some significant IPOs and M&As. The outlook for the rest of 2025 is guardedly optimistic, but there are also some headwinds, namely unresolved tariff disputes, Federal Reserve rate cuts, and continued geopolitical instability. 

First-Half Deal Value Falls Short of 2024 

In Q2 2025, VCs deployed almost $70 billion across 4,000 deals. The $70 billion invested in Q2 compares unfavorably to the $92.9 billion invested in Q1. Most of this variance was due to the $40 billion OpenAI VC financing included in Q1. 

Investors continue to have interest in anything AI/ML related. AI/ML deals represented more than 64% of first-half 2025 deal value and 36% of deal counts. The focus of VC investing on the AI/ML sector shouldn’t change any time soon. Even in a challenging fundraising environment, investors are laser focused on high-growth startups with large addressable markets, a clear path to profitability along with a potential exit.  

Investors Are Paying for Companies with Strong Fundamentals

For the first half of 2025, median deal sizes and pre-money valuations continued to climb across all stages. Median deal sizes for the first six months of 2025 for the pre-seed, seed, Series A, Series B,  Series C, and Series D and beyond were $0.9 million, $3.6 million, $13.7 million, $30 million, $61.2 million, and $100.0 million respectively. Median pre-money valuations are also increasing for each stage: for pre-seed, seed, Series A, Series B, Series C, and Series D and beyond for the first half of 2025 were $8 million, $15.5 million, $45.5 million, $119 million, $327 million, and $900 million, respectively.  

As Summer Temperatures Rise, Exit Market Shows Signs of Heating Up (Maybe) 

In Q2 2025, $68 billion in exits were recorded across 394 transactions. This was the best quarter for exits since Q4 2021. Adding to the exit market, VC-backed companies have recently become more acquisitive. In Q2, VC-backed companies completed $32.2 billion in acquisitions across 229 transactions.  

Q2 saw evidence of the return of the IPO market, which included the IPOs of six VC-backed unicorn companies. However, all these IPOs were actually “down round” IPOs—raising public capital at valuations below the last private funding rounds. It certainly looks like VC-backed companies would rather provide liquidity for investors than hold out for the possible return of better valuations. Even with the recent increase in IPOs, there has not been a dramatic increase in the number of new IPO listings. If these best VC-backed unicorns can continue to raise private capital at reasonable valuations, there are no real incentives to go public.

VC Fundraising Remains Depressed 

For the first six months of 2025, VC funds only raised $26.6 billion for 238 funds. This performance is significantly below the $81.2 billion that was raised for 700 funds in all of 2024. Without a dramatic increase in fundraising in Q3 and Q4, 2025 fundraising will be at its lowest level in the past decade. The inability of general partners to create liquidity and return capital to limited partners has certainly had a direct impact on fundraising.  

It should come as no surprise that it is taking VCs much longer to close funding rounds. The median time to close a funding round has increased from 12.6 months in 2024 to 15.3 months in 2025. This longer timeline is directly related to the recent underperformance of the VC asset class and the inability over the last couple of years to return capital to limited partners.  

Dry Powder Held by VC Funds Still Sits at Record Levels 

The amount of dry powder held by VC funds has certainly increased dramatically over the last decade.  Dry powder is currently more than $310 billion, which is a far cry from the $60 billion in dry powder held by VCs fund in 2015. Most of the dry powder is from funds of 2022 and later.  

Going Forward 

We finally began to see signs of life in the VC sector in the later part of Q2. This is despite the continued issues relating to tariffs, interest rates, and geopolitical conflict. Even though many IPOs that occurred in Q2 were done at prices below the last private rounds, the activity in Q2 is perhaps a bellwether of IPO activity to occur in the second half of 2025 and into 2026. Most VCs are still dealing with liquidity issues, and hopefully we will see continued signs of exit improvement in the second half of 2025. With VCs all enamored by all things AI/ML, record amounts of dry powder sitting on the sidelines, and trillions of dollars of valued locked in VC-backed unicorn companies, it is easy to be optimistic about the future of the VC sector. Let’s see what happens in the second half of 2025.