Venture capital outlook for 2025: 5 key trends

After a difficult couple of years in venture capital, 2024 saw the signs of a long-awaited recovery take root. It hasn’t been a fast rebound, and liquidity remains elusive, but looking ahead to 2025, we believe that the VC environment is healthier now than it has been for years.

In this paper, we explore venture’s recovery over the past year and lay out five anticipated trends that we believe will continue to build on that growth in 2025.

• Higher deployment and reasonable valuations
• AI opportunities and the fallacy of the first-mover advantage
• The rebounding IPO and exit markets
• The impacts of the 2024 election
• A higher-for-longer interest-rate environment

1. Venture capital deployment and valuations

In 2024, we observed a modest recovery in deployment, which grew by 20% compared to 2023 (Figure 1). Notably, what isn’t captured in this chart is the high quality of these deals. In our view, there aren’t just more companies coming back to the table to raise capital, they’re relatively stronger companies. 

We believe this is driven by three key factors: 1) strong public equity returns have renewed founder confidence in comps and market stability, 2) two-year cash runways set in 2022 are now dwindling, and 3) time has allowed high-quality companies to grow into elevated valuations from 2021.

Critically, this trend is happening while valuations have stayed reasonable (Figure 2). Right now, we’re seeing the majority of deals pricing at historical averages (with AI as a noticeable exception).

We anticipate both the modest uptick in deployment and reset valuations could continue into 2025. Importantly, a strong exit market could inject excitement into the market and potentially fuel an outsized increase in both deployment and valuations in line with historical activity. While the rise in deployment generally signifies a healthy market, we are carefully monitoring valuations to ensure they support successful exits.

2. AI in venture capital 

Discussions of venture in 2025 can’t avoid the artificially intelligent elephant in the room. As we’ve written about previously, we’re excited about developments in AI and believe the disruption should create significant opportunities for venture capital. However, we are also wary of the potential for pitfalls to avoid over the next few years. 

The explosive growth of AI draws parallels with the dotcom bubble, and one key lesson from that period is the fallacy of the first-mover advantage (Figure 3). Not all of the early AI winners will be able to convert today’s initial hype and success into long-term dominance, similar to the varied outcomes of the first internet companies. The challenge for investors will be identifying the durable companies with scalable competitive advantages, such as Amazon, and the nondurable companies with flashy early success, like CMGI. This variability is essential to understanding the current and future state of AI venture investments.

The pace of change, model improvement, and overall innovation in AI make the start-up winners hard to predict. The same dynamics make us optimistic that, as in prior periods of dislocation, huge AI-native companies are being built. There appear to be clear winners in this first wave of growth, namely the enabling technologies like GPU suppliers, foundation model builders, and suppliers of cloud computing capabilities. But, in our view, we are in the very beginning of this trend, and it could take time for applications to take hold. The job for venture investors is to pick both the sectors and companies with the greatest potential to survive and thrive over the long term. It is also to maintain perspective and realize that many of the biggest winners like Google may come in the second wave. 

3. A strong IPO market and exit environment

We anticipate that the IPO market could rebound in 2025, driven by three major factors. First, historically, the longest observed period between peaks in US IPO activity over the past 40 years has been three years and the end of 2024 will mark the end of the third year.¹ Second, US IPO activity tends to be 39% higher in post-election years compared to election years and 24% higher than in other years.² Both historical trends suggest 2025 may be primed for the market to reopen.

Third, as they consider an IPO, executives typically look to their peers to see how other recently IPO’d companies are performing. Notably, even though issuance has remained low this year, we have seen strong performance. Comparing the first three quarters of 2024 to the same period in 2023, there were 24% more IPOs in the US, but they generated 37% higher proceeds.³ Moreover, post-IPO performance has been very strong to date, with US IPOs outperforming the S&P by almost 10%.⁴ Below, we dive into what deregulation in Trump 2.0 might mean for IPO/M&A volume, as well as other impacts of the 2024 US election. 

4. US election: Impact of Trump 2.0 on venture capital

The recent election results are anticipated to have a profound (though varied) impact on private equity through exit activity, company performance, and the inflation/interest-rate environments. These can broadly be split into short-term and medium-/long-term implications. 

Near-term election impacts

The new administration’s agenda suggests that that we should expect reduced regulation and oversight and a possible acceleration for crypto-related business models. Pending confirmation hearings, we may also see changes in Federal Trade Commission M&A engagement, which could unlock much needed liquidity for private equity. 

Overall, these near-term impacts could provide a tailwind for private equity liquidity. Early signs of support for this outlook include investment banks that have experienced notable stock gains since Trump’s election win. In addition, the Goldman Sachs IPO Issuance Barometer now reads 137 (relative to a historical baseline of 100).⁵ Finally, potential tax cuts could further fuel short-term performance for venture-backed business. 

Medium- and longer-term policy implications

Many investors are closely monitoring trade policy, as President-elect Trump may implement tariffs which do not require legislation. According to Goldman Sachs economists, it is anticipated that Trump will impose tariffs on imports from China, averaging an additional 20%. European companies could also be subject to tariffs. Interestingly, the uncertainty surrounding trade policy might result in a more significant economic impact than the tariffs themselves.⁶

If the tariffs are implemented, consensus is that inflation may not continue its current trajectory and could even begin to rise again. This could result in lower interest-rate reductions than formerly forecast, with the extreme case being interest-rate increases by the Fed. 

5. A higher-for-longer interest-rate environment

The post-election rise in longer-dated treasuries, despite recent Fed cuts, suggests the market is pricing in a higher-for-longer interest-rate environment. We believe investors need to prepare their privates portfolios accordingly. 

Like most macro developments, the impact of interest-rate changes tends to hit public markets first and flow through to private markets over time. However, we think it is important for investors to understand the varying degrees of rate exposure across the diverse private equity landscape (Figure 4). Because buyouts rely on leverage to finance transactions, interest rates generally affect them more directly. Venture capital and growth equity funds rarely finance their investments with leverage and, therefore, tend to avoid the challenges associated with direct interest-rate exposure. They do, however, experience indirect impacts, primarily through shifting valuations. Since valuations are already at historical levels, we are less concerned about a drop in valuations.

In our view, venture capital and growth stand to gain the most from these developments, while the buyout sector may face challenges from expected inflation and higher interest rates. Whatever the outcome, we believe diversification across private equity will be crucial to navigating the anticipated volatility. Combining venture capital, growth, and buyout in a portfolio allows investors to allocate across a business’s life cycle, potentially improving exposure and diversification.

Outlook for venture capital in 2025

The period following a market correction often presents a strong opportunity to deploy capital. As we move into 2025, we believe the venture capital and private equity markets are positioned for growth, driven by advancements in AI, a rebound in the IPO market, and favorable regulatory developments. By maintaining a balanced, diversified, and adaptable approach to private markets, investors can capitalize on the opportunities (and potentially mitigate the risks) presented by today’s evolving market landscape.

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¹ Source: Warrington analysis on Initial Public Offerings. Data as of 1 January 2024. The sample is IPOs with an offer price of at least USD 5.00, excluding ADRs, unit offers, closed-end funds, REITs, natural resource limited partnerships, small best efforts offers, banks and S&Ls, and stocks not listed on CRSP (CRSP includes Amex, NYSE, and NASDAQ stocks). Past results are not necessarily indicative of future results. | ² Source: EY Global IPO Trends Q2 2024. | ³ Sources: Ernst & Young, Dealogic as of 30 September 2024. | ⁴ Sources: Ernst & Young analysis, Dealogic, S&P Capital IQ | IPO and index returns as of 16 September 2024. IPO return YTD change in common share pricing of newly listed companies, weighted by market capitalization, compared to their offer prices at the time of listing. | ⁵ Source: Goldman Sachs, How Trump’s election is forecast to affect US stocks, 8 November 2024. | ⁶ Ibid.