$40 Billion OpenAI Mega Deal Lifts VC Q1 2025 To 3 Yr Record As Volume Drops

AI - and more to the point - OpenAI saved the VC investing quarter. Again. But the overall situation could be described as disappointing and even worrisome. 

The basic issue is that AL, especially a few companies, are hoovering up most of the action in the industry. Fintech, health and other once promising fields are seeing less activity. This not only reinforces concerns about concentration due to attendant costs and first mover advantage, but does so within the framework of ongoing user frustrations about utility and price that have kept uptake at reduced levels. The VC industry and tech generally remain ardently upbeat as the hype machine's relentlessly pounds away, but prudent investors appear conscious of the risks. JL

EY reports:

A record $40 billion AI deal lifted VC investment to its strongest quarter since Q1 2022. (But) until the deal was announced on March 31, venture investment (would have) fallen 36% from Q4 2024. Instead, VC-backed companies raised $80.1 billion in Q1 2025. Deal volumes were off from last quarter. This could be a signal of how reluctant investors are to continue to finance companies in follow-on rounds without a clear path to liquidity. Significant dry powder remains, although fund formation of $10 billion for the quarter, makes it the lowest level since Q3 2018. Megadeals were not as prevalent as in Q4 2024.
A record $40 billion AI deal lifted venture capital (VC) investment to its strongest quarter since Q1 2022. Until the deal was announced on March 31, however, venture investment had been on a pace to fall 36% from Q4 2024. Instead, VC-backed companies raised $80.1 billion in Q1 2025, a 28% quarter-over-quarter increase. 

 

Deal volumes were off from last quarter. This could be a signal of how reluctant investors are to continue to finance companies in follow-on rounds without a clear path to liquidity, especially for those that haven’t raised since 2021. This will continue to be an issue until more companies move from the private to the public markets.

Significant dry powder remains on the sidelines, although fund formation just topped $10 billion for the quarter, making it the lowest level since Q3 2018. There were 79 transactions surpassing the $100-million mark in Q1 2025, down from 90 in Q4 2024. There were 79 transactions surpassing the $100-million mark in Q1 2025, down from 90 in Q4 2024.

While AI deals bolstered VC investment as in the prior quarter, megadeals were not as prevalent as in Q4 2024, where the top four deals were AI-driven and raised $26.6 billion. In comparison, excluding the $40 billion transaction, there were five AI deals that raised $8.6 billion in the top 10 for Q1 2025. Information technology (IT) continued to dominate the VC ecosystem, representing 74% of investment and accounting for seven of the top 10 deals as investors retained their focus on companies with significant AI influence.ⁱⁱ The sector would have accounted for nearly 50% of the investment even without the $40 billion deal. Both health care and industrial goods and materials posted a strong quarter, showing 15% and 3% growth respectively, quarter over quarter.

On the other hand, business and financial services demonstrated further weakness, logging only eight deals of $100 million and over in Q1 2025, compared with 20 last quarter. 
Driven by activity in the IT sector, the Bay Area accounted for nearly 70% of all VC investment. The New York area posted a strong showing, led by a $3 billion deal in Q1 2025, a startup that uses AI to power digital media and e-commerce. Austin leaped into third place, fueled by two top 10 deals, to finish ahead of Boston and Seattle. 
While 2025 is off to a great start, Q1 results were impacted by one significant deal that won’t be repeated. Venture capitalists are still working through a backlog as they carefully evaluate deals. Investment in AI companies drove over 70% of all VC activity and shows no immediate signs of tapering off. While we have seen some unexpected technological advancements in the open-source large language area, the underlying infrastructure for AI still needs to be built out as investors begin to focus more on the application layer as investment opportunities. 
The lack of liquidity has tempered investor enthusiasm for pouring new funds into legacy VC deals. Given the high valuations that many companies received during the bull market of the early 2020s, many founders may be reluctant to accept a lower number and may be waiting for conditions to improve. However, founders should remember that valuations should be a realistic projection of future growth and not as a reward for past success. It’s also important to focus on running a sound business, which means continuing to invest in people and financial infrastructure. The current environment of market volatility we have entered could have several implications to the venture market. If this uncertainty continues, it could create a challenge for venture capitalists looking to raise venture funds. Companies that were anticipating liquidity this year may need to return to the private markets to raise additional capital until the public market stabilizes.

 

Nevertheless, this remains an excellent time to start a company. Access to talent and new technology have never been better, and founders with a compelling value proposition and a knack for developing long-term relationships will find themselves poised for success in this environment and in the future.