The new year brings with it, at least in some sense, hope for a better tomorrow. In the world of venture capital, nothing is completely predictable. The number of companies in the U.S. has plummeted as risk-averse institutional investors have poured money only into big Silicon Valley companies, the Financial Times reported. The only category that seems important is AI, and that doesn't seem to be changing anytime soon. But the new year is only just beginning, and perhaps the impetus for change is also increasing.
We spoke to several VCs to hear their predictions for the new year: the good, the bad, and the possibility of the unexpected.
Their responses have been edited and shortened for clarity.
What are the good and bad predictions for ventures in 2025?
Nekeshia Woods, Managing Partner, Parkway Venture Capital
The good: As wealthy individuals lower their return expectations on bonds and cash equivalents, they will turn more aggressively to private markets for outsize returns. This channel is expected to invest more than $7 trillion in private markets by 2033. In response to this expected influx of capital, we have seen large asset managers use venture capital as a strategy to differentiate their services in the private markets. These institutions are positioning venture as a strategy that can provide access to the best deals while capturing a portion of the $7 trillion expected to be invested in private markets through net new flows. Fund managers will also be able to partner with these institutions to gain access to a new set of LPs that will generate new, consistent, long-term capital flows for their funds.
Even better: We expect to see more consolidation in the AI space, primarily through acquisitions, in areas where AI can become a commodity, such as large-scale language models. AI companies that become leaders in their respective fields are opening up new market segments and owning their own data.
Gabby Cazeau, Partner at Harlem Capital
The good: The IPO market has fully reopened and several high-profile IPOs will bring much-needed liquidity. It's a win for everyone. In the early stages, the pace of investment will accelerate, perhaps not to 2021 levels, but certainly beyond 2022-2024. Hopefully 2025 will be a great year for ventures and the next bull market will officially begin.
The bad: 2025 will be a make-or-break year for AI startups selling to enterprises. Although many AI startups are growing rapidly, they remain in the “experimental” stage and live off innovation budgets rather than a portion of their core software spend. Many companies fail to jump on board, leaving many startups on the brink as turnover and slow growth take over.
Triin Linamagi, Founding Partner, Sie Ventures
The good: The emergence of solo practitioners and angel funds will increase investment in early-stage companies. This is a much-needed evolution for the venture capital ecosystem.
We will see a more specialized and defined investment approach where industry-specific and knowledgeable investors provide meaningful value to founders. This change is not only beneficial for startups, but could also lead to better returns for investors. Capital allocation to diverse founding teams will continue to increase, especially in areas such as sustainability and healthcare where diverse perspectives can drive innovation and impact.
The bad: Market conditions remain challenging, with meaningful M&A and IPO activity unlikely until late 2025. Limited partners will continue to be hesitant to commit capital and will wait for allocations to paid-in capital metrics to improve before committing to new capital.
Michael Basch, Founder and General Partner of Atento Capital
The good: The opening of the IPO and M&A markets has provided much-needed liquidity for LPs. An increasing number of funds and companies are taking on secondary investments. Once expectations are reset for profitable zombie companies, they won't do as well as venture capital on the cap table to take them on and sell them to private equity at a more sensible price. Integration and rollup in supersaturated spaces (e.g. GLP-1).
The bad: The decline continues for unicorns whose valuations have been significantly reset due to market contraction and resetting of growth expectations.
Austin Clements, Managing Partner, Slauson
The good: Following the success of Service Titan, the IPO market will reopen and private company M&A activity will resume. When these profits are eventually realized, they increase liquidity for the LPs behind many venture capital firms. This will lead LPs to commit to more new funds, more venture funds than in years past.
Bad points: [LPs] They may be reluctant to commit to a new fund manager as they saw a lot of undisciplined behavior in the last cycle. An unfortunate side effect is that some of the most innovative strategies have great difficulty raising capital.
What trends do you think are here to stay? Which one is going to stay?
woods
What remains: Dry powder trading remains favorable for investors. Investors will continue to move away from using products such as: [the] Make 'number of users' a key consideration and move towards recorded revenue, client pipeline, and costs as key pre-investment considerations. The pace of investment will also maintain this investor-friendly environment. We do not expect venture companies to return to the frenetic investment pace experienced over the past few years, but to continue with a balanced approach.
Looking ahead: The outlook for IPO activity is moderately positive. Founders have renewed confidence in public markets and companies, and highly valued companies that have overcome recent funding constraints, coupled with fewer financing options, are seeing their valuations right-sized to more closely align with the market. There is. Given the mega-cap technology stocks that have driven U.S. indexes to all-time highs and returned significant shareholder value, we believe consumers are well placed to invest in small-cap stocks as well. While there are many companies whose valuations have not yet been reflected in the market, others, primarily in the technology sector, are ready for the public market.
Cazeau
What remains: A small team that grows revenue. We're seeing teams of just 1-3 people achieve over $2 million in ARR using AI tools. This allows you to do more with less and achieve better results than ever before. This kind of growth is unheard of before 2024 and highlights how much startups are automating internally using new software tools. The big question now is how these teams scale and build strong organizations, but it's impressive to see so much growth with such a lean setup.
There will also be a resurgence of investment around reskilling, a platform that addresses talent shortages in skilled trades, manufacturing, hospitality, healthcare, and other sectors that cannot be automated with software.
Rinamaji
What’s here to stay: AI is here to stay. I believe that 2024 will mark a major shift in the adoption of AI, and that this momentum will continue to grow. While this presents tremendous opportunities, including enhanced decision-making, improved trade sourcing, and streamlined operations, it also presents challenges. For example, human intuition and experience remain important, especially when evaluating founding teams and their dynamics. This evolution requires LPs to think more critically about how they select managers and structure their portfolios.
What Happens: A spray-and-pray investment approach. There will be fewer deals, but I think investors will be more engaged and create meaningful added value. This trend is already evident in 2024, marking the end of the growth-at-all-costs mentality. Instead, investors will prioritize a path to profitability and sustainable business models, which will continue to be the hallmark of attractive opportunities.
bash
What remains: [The] A list of perceived fewer winners in the AI space will continue to attract significant investor attention at premium valuations. [There will be a] The trend of VC-backed companies being shut down as a capital market continues. [become] Be more selective about financing [and the] continuing trend [of] VC, especially at the seed stage, [being] Due to the poor performance of the 2020 or 2021 vintages, we were unable to raise new funds.
clements
What's next: The last cycle was a significant shift with more investors backing enterprise SaaS companies and fewer investors backing consumer applications. I think this will start to reverse as AI creates more consumer-facing applications that were not possible a few years ago. Consumer technology will make a welcome comeback in 2025.
What unexpected events could happen in the venture and startup world in 2025?
Cazeau
There may also be mergers or closures of some well-known unicorns, many of which have been industry darlings for years. These companies have enough cash to get to 2025, but not enough to grow beyond that. We are already seeing some consolidation, and this is likely to accelerate as we head into 2025.
Rinamaji
A major climate-related disaster, geopolitical conflict, or economic shock could fundamentally reshape the startup and VC landscape.
bash
As software becomes a commodity due to generative AI, venture funding focusing on hard technology is rapidly increasing. The focus will be on hard technologies, defined by bio, technological, hardware, and other forms of deep technology. [There will also be] There has been a significant increase in the number of companies that have only raised seed rounds, have been in business for less than three years, and have exits of less than $100 million. This allows companies with distribution to quickly acquire top products and complement existing services.
clements
What was unexpected was that OpenAI might turn into a commercial entity just to allow Microsoft to acquire it in the largest acquisition in history.