Executive Summary
Europe’s VC system faces most difficult year in a decadeIn Europe, the VC system faces its most difficult year in a decade, with drying fund pipelines, LP hesitancy, and weakening institutional support. Unless conditions improve, the risk of long-term innovation loss grows.
AI continues to drive the bulk of VC activityThe vast majority of global VC funding in Q1 2025 was concentrated in AI, with over 70% of U.S. deal volume tied to AI-related companies. Outside of AI, activity remains muted across most sectors.
Post-seed startups are increasingly shifting toward sustainable growthAs later-stage capital becomes increasingly selective, many companies are abandoning hypergrowth playbooks in favor of capital-efficient scaling and profitability.
A potential upside for early-stage investorsThis shift could benefit early-stage backers – while fund-returning exits may be rare, more disciplined growth paths may still yield solid multiples. With less dilution and a better position in the liquidation waterfall, early investors may ultimately fare better than some later-stage counterparts.
A Breakdown of Early-Stage Activity Shows U.S. Dominance
Early-Stage Deal Volume by Region – Q1 (Source: Preqin July 2025)
A breakdown of early-stage VC activity in Q1 2025 shows that activity was heavily concentrated in North America, which accounted for over 65.9% of all global early-stage deals – driven primarily by mega AI investments and a highly active U.S. investor base. In contrast, Europe significantly lagged behind, contributing just 17.2% of early-stage deal volume, while Asia followed with 10.8%. The Middle East and other regions made up only a small fraction of total activity.
In Europe, the picture is particularly bleak: VC fundraising dropped to €5.2B in H1 2025 – the lowest total since 2015, according to Pitchbook/Bloomberg. This not only reflects capital scarcity but also signals a potential long-term decline in the region’s ability to compete in critical sectors such as AI, Deep Tech, and Defense.
This geographic imbalance highlights how the current funding cycle is dominated by U.S. momentum, particularly around late-stage and AI-centric bets, while other ecosystems – including Europe – struggle to regain investor confidence and attract growth capital.
Decline in Deal Count, Rise in Deal Size
In general the number of VC deals continued to decline for a fourth consecutive quarter, reflecting increased caution among investors. However, median deal sizes rose, particularly in early-stage rounds, where the average grew ~35% to $2.7M.
Investors are becoming more selective – choosing to concentrate capital into fewer, stronger bets rather than spreading risk across many early-stage startups.
AI Remains the Main Driver of Activity
AI and ML companies dominated the investment landscape, accounting for an estimated 53-64% of global VC funding. In the U.S., AI-related deals made up more than 70% of all VC activity, spanning foundational models, agent-based systems, and applied AI use cases.
This unprecedented AI momentum has created a bifurcated market: companies in and around the AI ecosystem continue to raise capital at scale, while many others struggle to attract attention.
Sustainability Slips Down the VC Agenda
While AI continues to dominate investor mindshare, sustainability-focused startups are losing momentum. Once a top priority, the category has seen a clear pullback in both deal count and capital committed, especially in early-stage rounds.
In many markets, sectors like carbon offset platforms, energy efficiency tech, and green logistics are now deprioritized in favor of more capital-efficient or hype-driven areas. In Austria, for example, sustainability-related funding fell to just 7% of total VC volume in H1 2025, down from 46% a year earlier.
Unless sustainability startups can tie their story to AI or show rapid commercial traction, they increasingly struggle to cut through.
IPOs on Pause, M&A Drives Exits
While public markets remained largely closed in Q1 2025, small-cap M&A emerged as a key exit pathway, particularly for early-stage startups. Over 50% of all venture-backed acquisitions during the quarter occurred at the seed or pre-Series A stage -the highest share in more than a decade.
According to Crunchbase there were 550 M&A transactions involving VC-backed companies, representing a 26% year-over-year increase and totaling $71 billion in disclosed exit value. Although large headline deals like Google’s $33B acquisition of Wiz grabbed attention, the real momentum lies in the rise of small- to mid-cap transactions – typically in the $50–300M range. These smaller strategic exits are increasingly shaping the expectations of founders and investors alike, offering liquidity without the wait for IPO windows to reopen.
Venture Debt and Secondaries on the Rise
With equity markets still tight for many startups, alternative funding tools like venture debt and secondaries gained traction. More startups turned to debt to avoid valuation resets, while secondaries became an increasingly viable option for early employees and founders seeking partial liquidity.
Sector Highlights: Deep Tech, Defense, Energy & Fintech
Beyond AI, several other sectors showed notable activity:
- Defense tech (autonomous drones, robotics, naval systems) gained momentum amid geopolitical instability.
- Clean energy and fusion startups (e.g., Helion, X-Energy) raised large rounds, reflecting continued energy-focused innovation.
- Fintech remains resilient, with firms like Klarna eyeing IPOs.
- AgriTech saw some large later-stage deals, but seed funding in the sector remained stagnant.
Early Stage Struggles to Rebound
Global Early Stage Deal Count (Source: Preqin July 2025)
Early-stage funding continues to be a weak spot in the current VC cycle. Activity across angel, seed, and Series A rounds has declined steadily over the past three quarters, with no clear signs of recovery. While some rounds still close, many are structured as bridge or extension financings – often used to avoid valuation resets.
Founders are negotiating more flexible terms to protect equity, while investors remain cautious, prioritizing capital efficiency and holding back follow-on capital until stronger signals of growth emerge.
Post-Money Valuations Trending Up—but Skewed
Global Average Post Money Valuations (Source: Preqin July 2025)
Valuations across many funding rounds showed an upward trend in Q1 – but this growth is largely concentrated in Later Stage AI and deep tech. Startups that last raised capital in 2021–2022 are now returning to market, often after aggressive cost-cutting and runway extension.
While these valuations appear optimistic, they remain disconnected from broader market fundamentals in most sectors.
Looking Ahead
Q1 2025 showcased a highly concentrated VC market: massive funding totals driven by a few AI and deep tech deals, cautious investor behavior, and rising interest in non-equity financing options.
While macroeconomic indicators (like moderating inflation and potential rate cuts) point to improving conditions, most investors remain conservative – focusing on quality assets, supporting existing portfolios, and staying sector-focused.
We expect Q2 and Q3 to continue this pattern: strategic mega-rounds, selective risk-taking, and gradual reactivation of IPO and fundraising pipelines
European VC fund closings in Q1 2025
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