What’s Going on with Early-Stage Investing?

“I have never seen a more bifurcated fundraising environment.”

I recently shared this observation on LinkedIn in response to a post from the amazing Amanda Robson (“Robby”) of Modern Technical Fund:

Amongst the various responses — both sincere and snarky — to Robby’s post and mine were questions from a number of commenters,

“What do you mean?”

“Was there a time when this wasn’t the case?”

My instinct was to immediately respond, but I quickly realized that I didn’t know how to put in to words what I’ve been seeing. What I’ve been feeling.

In recent weeks, I’ve seen both sides of the proverbial fundraising coin. I’ve watched founders raise massively oversubscribed rounds in a matter of weeks, while others struggle on the brink of failure. I’ve spoken with early-stage VCs overwhelmed by the volume of high-quality companies they’re seeing, while others lament their inability to deploy capital.

Like many, I believe that there’s never been a better time to build a company (I can only imagine what we could have achieved at DataHero or Aster Data if we had the types of AI-driven tools that are available today). I also think that it’s an incredible time for founders to raise capital. Yet in both private and public conversations, I’ve been challenged on this latter point by founders and VCs alike (ask anyone who attended my recent Web Summit talk 😉).

What’s going on?

For starters, contrary to what some more cynical observers have suggested, this isn’t just a “return to normal”. The difference in fundraising experience between founders whose companies are “on thesis” and those that aren’t is far more pronounced than it was pre-2021. It’s also not the case that investors have already forgotten the lessons they learned post-ZIRP and are rushing into bad investments driven solely by FOMO (VCs still don’t skip diligence).

I believe that what we’re witnessing today in the early-stage market is both a realignment of the investment strategies of many early-stage VCs and a fundamental shift in how the best founders raise capital.

For the purposes of this post, I’ll focus on the behavior change that’s happening amongst early-stage VCs (and many angel investors) and save the founder perspective for another day.

Let’s start with the numbers. Carta’s recent State of Private Markets: Q1 2025 Report shows that the number of Seed deals has plummeted year-over-year, but the average valuations have increased sharply (including for bridge rounds).

Notwithstanding my standard disclosure that early-stage funding data is incredibly unreliable (as a result of the fact that many rounds are not disclosed until well after the investment is made), this tracks with what I’ve seen in the market: fewer rounds are happening, but those that do are oversubscribed, resulting in higher valuations.

But why?

On the one hand, large multistage funds are certainly throwing around more money, but that isn’t enough to explain this data. It’s also naive to think that investors are blindly chasing anything and everything AI.

…or is it?

The “aha” moment came to me in three acts…

1. The Oracle’s Report

First, there was the recent release of legendary analyst Mary Meeker’s first “Trends” report in 6 years, focused on all things AI. In a corresponding interview with Axios’ Dan Primack, she noted,

“We've never seen anything like the user growth of ChatGPT, particularly outside the U.S., and it shows how the global dynamics of tech and distribution have changed.

I wasn't around for the evolution of the mainframe or mini-computer, but have read up on it and was around for the PC, desktop internet, mobile internet, cloud, and now AI. This is such a faster pace of change.”

A lot of folks have compared the potential impact of AI to the emergence of the cloud (and, in particular, the impact of AWS) and the internet before that. Both are reasonable precedents in terms of the scale of impact, but we really have no precedent when it comes to the rate of growth. Consider the following:

AWS

• Initial beta release in 2002

• First infrastructure service, SQS, was released in 2004

• S3 was released in 2006

• EC2 was released in full production in 2008

• AWS surpassed 1 million users in 2012

• International releases were staggered, sometimes years after the US release

Open AI

• Initial beta release in 2018

• Initial public release (GPT-3.5 / ChatGPT) in 2022

• ChatGPT surpassed 100 million users two months later (January 2023)

• o1 was released in December 2024

• ChatGPT had 400 million users in 188 countries as of February 2025

AWS took approximately 10 years to get to 1 million users. ChatGPT took 2.5 years to get to 400 million uses.

Of course, this is not an apples-to-apples comparison (as AWS’ users are almost exclusively developers while ChatGPT is a general use program). But if we take that growth rate as an approximation for the growth of the underlying infrastructure (and what we’re subsequently seeing in agents and other AI-driven technologies), it’s clear that Mary’s observation is far from an understatement. The adoption of AI and AI-related technologies is happening faster than any foundational technology in history.

And a big part of that is due to the fact that these platforms are generally made available around the world from day one.

2. The Deep Tech Investor

A few days later, Leo Polovets of Humba Ventures, a prominent early-stage deep tech fund, posted the following on LinkedIn:

While the post itself was tongue-in-cheek, the message struck a chord with me. Leo is very well-respected VC who has both worked for and invested in multiple consequential companies. He’s making big bets, but not necessarily in AI.

This also maps to what I’ve been seeing in the market. While I’ve met with plenty of founders of AI-centric companies as of late, I’ve also met strong, ambitious founders working in manufacturing, space technology, transportation, infrastructure, and the mining of rare earth minerals.

There are a lot of founders working hard to solve big, consequential problems right now. Not only in AI.

3. The Frustrated Founder

In the midst of all of this, I met a founder who was extremely frustrated with the lack of progress they’d made raising capital from VCs. In relaying their experience to me, the founder proclaimed that they had a stellar founding team with an amazing track record, a working prototype and clear evidence of a market need. Yet they were getting zero traction with investors.

Later that day, I looked up the founder’s company and thought to myself, “what a nice, incremental business.”

“…incremental business.”

I don’t know why that particular phrase popped into my head, but that’s when everything clicked.

To be clear, there was nothing wrong with this founder’s business. It was — and is — a perfectly reasonable B2B SaaS company. The type that was built to solve a real problem and that very likely would have been able to raise VC funding 2 years ago (not because of ZIRP, but because it is a perfectly reasonable company solving a real problem).

Yet in comparison to AI companies, with their unprecedented growth trajectories, and deep tech companies, with their imagination-bending potential, it just felt…

…incremental.

Right now, we are entering a period of monumental technological change. Virtually every industry is going to be impacted by AI. At the same time, consequential technologies are on the verge of disrupting countless industries from energy to transportation to manufacturing to defense. Founders building in those spaces or who are able to convincingly argue why their company will benefit from the changing landscape are having more success fundraising than ever before.

But for founders of nice, incremental businesses. The type that solve a real problem and that very likely would have been able to raise VC funding 2 years ago, it’s a different story.

Not because they aren’t good businesses. But because they no longer capture the imagination. Which in the mind of an investor translates to a lower potential return (and always remember, the job of a VC is first and foremost to generate a return for their LPs). Moreover, in many cases, it’s not clear if the problem they’re solving will even be around in 5 years.

That e-commerce company you’re building? Is it relevant if AI changes how we shop?

That vertical B2B SaaS company you’re building? What happens if someone can vibe code a competitor next year?

These may sound like facetious questions, but I promise they’re not. We really don’t have any precedent for the adoption of AI. Which is why investors are piling into the relatively small number of companies whose founders can clearly articulate why they will be relevant in a post-AI world. And saying no to virtually everyone else.

It might not seem fair, but I think this is going to be the fundraising reality for the immediate future — at least until we have some more clarity around the rate at which AI and AI-driven technologies will permeate the broader market.

So if your company started out before the AI wave, you’re not building in deep tech, and/or you don’t have a convincing answer to the question, “why will this be relevant in 5 years?” then I’m afraid that VC (probably) isn’t right for you.