The world of venture capital is resetting on a large scale. If you’re a founder, investor, or even startup-adjacent, you can likely sense it: the classic playbook—raise big, grow fast, IPO—is no longer working. In its stead? A more erratic, more discerning, and much more AI-fixated funding environment.
Here’s what’s behind this change, what it implies, and how the savviest players are adapting.
The AI Gold Rush Is Real—and It’s Reshaping the Market
Today, if you’re not creating something AI-first, forget about getting a VC meeting. In Q1 2025 alone, 74% of the U.S. venture and growth equity investment found its way into AI startups. Even excluding megadeals such as OpenAI’s $40 billion raise, nearly one-quarter of all VC dollars still poured into AI.
It’s not a fleeting fad. As General Catalyst CEO Hemant Taneja explained, “AI is a transformative force. If these companies can reasonably grow 10x, they’re worth betting on.” That conviction is propelling enormous influxes of cash into a comparatively small number of AI startups, pushing valuations higher and crowding out almost everybody else.
As Pitchbook’s Kyle Stanford describes, “The market has become very bifurcated. A few companies can raise infinitely, while the rest are experiencing a serious capital crunch.”
Exit Options Are Drying Up
With the IPO window largely closed, M&A activity slow, and debt levels increasing, most startups are in limbo. Those formerly lucrative exit channels aren’t working. A number of high-profile IPOs have been delayed, and VCs, now subject to the pressure to return capital to LPs, have fewer tools at their disposal.
Secondary markets, which tend to release liquidity in anticipation of an IPO or acquisition, aren’t helping much either. More startups are going there, but higher supply and lagging demand translate into deeper discounts and weaker valuations.
Down Rounds Are No Longer Taboo
Not so long ago, a “down round”—raising funds at a lower valuation than previously—was avoided at all costs. No longer. As capital became scarce, startups have become pragmatic. A valuation reset is now viewed as a rational, even healthy, move.
Telstra Ventures’ Yash Patel encapsulated it: “Down rounds are less stigmatized. That’s the new normal.”
Some companies are also embracing structured rounds, which feature investor-friendly provisions like 3x liquidation preferences. But most in the industry view this as a last resort. Chris Farmer, CEO of SignalFire, says he’d sooner adjust valuations to sustainable levels. And, he says, coupling a down round with revamped employee equity can help keep employees motivated and engaged.
“In today’s climate, execution matters more than hypergrowth,” Farmer says.
The Power Law Still Dominates
It’s all changed, or so it seems. But one thing remains the same: most startups will fail, a few will break even, and a very small number will provide outsized returns.
A VenCap analysis of over 9,000 portfolio companies revealed that:
- More than 60% gave back less than they invested.
- Just short of 5% returned a 10x
- Less than 1% were “true fund returners.
So while VCs are pivoting, the game is still the same: identify and support the outliers. Currently, that means doubling down on AI.
Policy, Politics, and the Silicon Valley Wild Card
With the potential for a second Trump presidency looming, there is speculation in the tech community as to how that could impact AI regulation and capital markets. There is guarded hope that less regulation and a more business-friendly approach could serve the startup community well.
Chris Farmer points out that regulatory transparency, particularly in regards to AI and open-source models, s—would assist founders and investors in confidently steering risk.
Jim Wunderman of the Bay Area Council phrased it more tactfully: “We have to find ways to work with his administration the best we can. In many ways, it could end up being very positive.”
What Founders and Investors Should Do Now
So what’s the way ahead in this new reality? The VCs’ message is simple: get lean, save cash, and build towards sustainability. Growth for growth’s sake is over. Focus, discipline, and free cash flow are in.
Founders are being told to:
- Shrink burn rates
- Home in on what’s working
- Map a clear course to break-even.
There’s still plenty of opportunity in venture capital—especially if you’re building in AI—but the game is tougher, and the margin for error is slimmer. For those who adapt, this new era could be just as rewarding as the last. But make no mistake: it’s going to take more than a pitch deck and a moonshot to get there.
