The Great Venture Squeeze: Fundraising Plunges to Decade Lows Even as AI Ignites Startup Frenzy

In the high-stakes world of venture capital, where billions flow into tomorrow’s tech giants, a startling paradox is unfolding. While artificial intelligence startups are soaking up record investments, the funds themselves are struggling to raise money at levels not seen in over a decade. According to a recent analysis by The Information, venture capital firms are on pace to close the fewest new funds since 2013, with total capital raised projected to hit its lowest mark in 10 years. This fundraising drought comes at a time when investor enthusiasm for AI-driven companies is at fever pitch, highlighting a rift between the allure of hot sectors and the broader challenges facing the venture ecosystem.

The numbers paint a grim picture for fund managers. Through the first three quarters of 2025, only about 376 new venture funds were launched globally, a sharp decline from previous years. Capital raised during this period totaled roughly $45.7 billion, far below the peaks of the early 2020s when easy money from low interest rates fueled a fundraising bonanza. Industry insiders point to a combination of factors: limited partners, such as pension funds and endowments, are over-allocated to private markets after years of aggressive commitments, and they’re now demanding better returns amid a sluggish exit environment. Liquidity has become a buzzword, with many backers hesitant to pour more money into illiquid assets without clearer paths to cashing out.

This squeeze is reshaping how venture firms operate. Smaller outfits, in particular, are feeling the pinch, as mega-funds like Sequoia and Andreessen Horowitz continue to dominate capital inflows. The concentration of power in fewer hands means that emerging managers—those raising their first or second funds—are finding it tougher to break through. One venture partner, speaking anonymously, described the current climate as “Darwinian,” where only the most established players with proven track records can secure commitments from wary limited partners.

Shifting Investor Priorities Amid Economic Uncertainty

The reluctance among limited partners stems partly from broader economic headwinds. Inflation concerns, geopolitical tensions, and a volatile stock market have made institutional investors more conservative. Reports from Bain & Company indicate that despite a resilient U.S. market buoyed by AI investments, global venture activity has dipped, with fundraising totals down 18% from 2023 levels. In 2024 alone, funds closed on $104.7 billion, marking a six-year low, and 2025 shows no signs of a quick rebound.

Compounding the issue is the so-called “denominator effect,” where the value of public market holdings in portfolios has fluctuated, leaving less room for additional private commitments. Limited partners are also grappling with vintage funds from the boom years that have yet to deliver expected returns. As one post on X from investor Nikita Titov noted, VCs are increasingly hearing demands for liquidity, underscoring a mood of caution that permeates the industry. This sentiment aligns with data showing that venture distributions to limited partners have slowed, with exits via IPOs and acquisitions not keeping pace with capital calls.

Yet, amid this gloom, certain sectors are thriving. AI remains the golden child, with startups in this space attracting massive rounds. A TechCrunch article highlighted that 49 U.S.-based AI companies raised $100 million or more in 2025, fueling a surge in deal values even as overall deal counts decline. This bifurcation—where AI eats up the lion’s share of funding while other areas languish—illustrates the uneven recovery in the venture scene.

AI’s Dominance and the Fundraising Paradox

The AI boom is both a blessing and a curse for venture firms. On one hand, it provides compelling narratives to pitch to limited partners, promising outsized returns from the next wave of technological disruption. Deloitte’s insights suggest that AI could catalyze a market thaw, with recent IPO activity hinting at a potential comeback for public offerings. However, the concentration of bets in AI has led to concerns about overvaluation and bubble risks, making some backers wary of committing fresh capital without diversification.

Fundraising challenges are particularly acute for non-AI focused funds. Biotech, for instance, has seen a mixed bag, with Fierce Biotech tracking significant venture rounds but noting that overall activity remains subdued compared to pre-pandemic highs. In crypto, Cointelegraph reports that venture funding in November 2025 was muted, with deal counts at yearly lows despite a few large raises. This sector-specific disparity means that funds without a strong AI thesis are struggling to differentiate themselves in a crowded market.

Moreover, the rise of mega-rounds—deals exceeding $100 million—has skewed the overall picture. PitchBook data reveals that 70% of U.S. venture capital now flows into these large rounds, leaving early-stage startups fighting for smaller pools of capital. An X post from devcorporate emphasized this reality, pointing out that pre-seed raisers in Q3 2025 are essentially competing for scraps, a trend that could stifle innovation at the grassroots level.

The Impact on Startups and Emerging Managers

For startups, the fundraising crunch at the fund level translates to tougher terms and longer diligence processes. Founders are finding that even with promising traction, securing investment requires more proof points than ever before. Wise’s overview of 2025 trends notes a resurgence in unicorns, but this is largely confined to AI and biotech, leaving other verticals underserved. The emphasis on profitability and efficient growth, as echoed in an X thread by Yasser, suggests a shift toward bootstrapped models, where small teams leverage AI to build without massive early funding.

Emerging managers face an existential threat. With mega-funds leading 20% of sub-$5 million rounds, as detailed in an analysis shared on X by Nic Poulos, alignment between investors and early-stage founders is eroding. These large funds, by nature, prioritize deals that can move the needle on their massive portfolios, often overlooking smaller opportunities that once defined venture’s risk-taking ethos.

This dynamic is forcing some firms to adapt creatively. Continuation funds, secondary sales, and other liquidity mechanisms are gaining traction as ways to return capital to limited partners without traditional exits. TechCrunch’s coverage of the liquidity crisis quotes limited partners frustrated with funds stretching beyond 20 years, compelling a rethink of allocation strategies.

Global Perspectives and Regional Variations

Looking beyond the U.S., the fundraising slowdown has global ripples. In India, a report from India Tribune indicates that private equity and venture deals reached a decade high of 1,761 in 2025, signaling confidence in emerging markets. However, this contrasts with muted activity in Europe and parts of Asia, where economic pressures have dampened investor appetite. Bain & Company’s global outlook underscores U.S. momentum as a key driver, but warns that without broader recovery, the venture environment could remain fragmented.

Crypto and deep tech sectors offer additional insights. An X post from Solus Group highlights that while total crypto funding sits at $5.2 billion, deal numbers are down 49% from peaks, indicating that capital is selective, favoring mature projects over speculative ones. Similarly, Wellington Management’s projections, referenced in an X update by Few Shot, anticipate a 20% increase in capital deployment, driven by pro-crypto policies and AI advancements, yet this optimism is tempered by fundraising hurdles.

Venture firms are responding by honing their strategies. Some are focusing on niche areas like climate tech, as outlined in GoingVC’s trends report, which predicts innovative funding models to bridge gaps. Others are emphasizing operational efficiency, with X user Greg Isenberg noting how AI has transformed economics, turning former money pits into lean operations.

Future Outlook and Strategic Adaptations

As 2025 progresses, the venture capital scene may see a gradual thaw if interest rates stabilize and exit markets improve. Deloitte anticipates that AI could spark more IPOs, providing the liquidity jolt needed to encourage new commitments. However, without structural changes—such as better alignment on fund lifecycles and diversified portfolios—the fundraising lows could persist.

Industry veterans like Jason Lemkin, in an older but still relevant X post, have long warned about poor financial practices exacerbating issues, a problem that persists as funds scale without proper infrastructure. Recent data from Venture Capital Journal reinforces this, with 2024 fundraising at a six-year low, setting the stage for continued caution.

For limited partners, the key will be balancing risk with reward. As one X post from Rohit Mittal categorized fundraising into exponential growth areas like AI infrastructure and deep tech, success may hinge on backing theses that promise resilience. Waveup’s blog on 2025 trends echoes this, forecasting shifts in fundraising dynamics alongside AI’s rise and potential IPO rebounds.

Navigating the New Normal in Venture

The paradox of booming AI investments amid a fundraising drought underscores a maturation in the venture world. Funds that can demonstrate strong governance, clear exit strategies, and alignment with limited partners’ evolving priorities will likely emerge stronger. Exploding Topics’ forward-looking post, though from 2024, identifies trends like smaller round sizes and focus on IPO readiness that are playing out now.

Startups, meanwhile, must adapt by building more capital-efficient businesses. An X insight from pj predicts fewer new startups and drier powder, emphasizing the need for founders to prove viability early. This could foster a healthier ecosystem, weeding out less viable ideas while rewarding true innovation.

Ultimately, the current squeeze may redefine venture capital, pushing it toward sustainability over speculation. As Katie Roof’s X post starkly put it, venture fundraising is at its worst in at least a decade, a reality that demands introspection and adaptation from all players involved. With AI as a beacon of hope, the path forward lies in bridging the gap between enthusiasm for breakthroughs and the pragmatic demands of capital providers.