By Samantha Barnes, International Banker
After a sharp correction coinciding with rapidly rising funding costs from 2022 onwards, global venture capital (VC) showed distinct signs of sustained, buoyant growth in 2025, which continued into this year. As such, optimism is growing over the sector’s prospects for 2026 and perhaps even beyond. Despite these encouraging signs of positive momentum, the narrowing distribution of capital across a comparatively small number of deals against the backdrop of a turbulent operating environment suggests that this bullishness may remain confined to a small segment of the market.
As CB Insights reported, two years of decline in 2023 and 2024 were followed by a spectacular rebound in 2025, with global venture funding posting year-on-year growth of 47 percent to reach $469 billion. What’s more, the fourth quarter (Q4) of 2025 alone attracted $152 billion, the strongest quarterly performance since the first quarter (Q1) of 2022.
This recovery masked a worrying trend, however, with capital becoming increasingly concentrated in late-stage and mega-round financing, particularly in technology companies linked to artificial intelligence (AI), cloud infrastructure and semiconductors. Early-stage activity remained subdued, reflecting both investor caution and a recalibration of valuations.
The number of deals also declined, further underscoring the prevailing trend of narrowing capital, with investors preferring to deploy larger amounts into fewer companies and prioritising perceived winners, rather than maintaining broad exposure across the startup ecosystem. “In 2025, deal count fell 17 percent to 29,501, while mega-rounds surged 77 percent to 738, capturing $307 billion (65 percent of total venture funding),” CB Insights noted in its “State of Venture 2025” report. “Investors are increasingly writing bigger checks to fewer companies, with the biggest AI startups capturing most of the money.”
The concentration of venture funding can also be examined through a geographic lens. “Nearly all of that capital is flowing to one place. US startups raised $328 billion in 2025—70 percent of global funding—approaching its 2021 record of $358 billion,” CB Insights added. “Meanwhile, Asia and Europe grew modestly but remain far below their 2021 peaks. Asia increased 7 percent to $53 billion, while Europe rose from 18 percent to nearly $68 billion.”
As for 2026 thus far, the first quarter only reinforced those 2025 dynamics. Headline funding volumes showed improvement relative to late 2025, with Q1 even besting the previous quarter’s strong showing. “Quarterly venture funding reached $285.5 billion in Q1’26, the highest quarterly total on record. But that headline figure was driven largely by a single transaction: OpenAI’s $122 billion raise accounted for 43 percent of all funding during the quarter,” CB Insights’ “State of Venture Q1’26” report stated. “Still, even without that financing, Q1’26 would have seen $163.5 billion in funding—more than any quarter since Q1’22.”
The OpenAI deal is certainly emblematic of this new reality, with bumper funding volumes being supported by several large transactions in AI-related companies. However, the distribution of capital remains highly uneven, with a small number of deals continuing to account for a disproportionate share of total investment, and activity across most other sectors remaining relatively subdued. As such, it would increasingly appear that, for the most part, venture-capital investors are willing to commit significant sums only where they see clear technological leadership or strategic importance, but remain cautious elsewhere.
This trend has led to a decidedly bifurcated venture-capital landscape, with pockets of intense activity residing alongside broader stagnation.
This trend has led to a decidedly bifurcated venture-capital landscape, with pockets of intense activity residing alongside broader stagnation. As PitchBook noted, the top five deals in the first quarter of 2026 were OpenAI, Anthropic, xAI, Waymo and Databricks, together representing around three-quarters of total venture investment, only further underscoring AI’s dominance as the primary driver of the investment surge. “This level of concentration is without precedent in modern venture history,” Ginger Chambless, JPMorgan Chase’s head of market insights for commercial banking, said of the Q1 trends. “The market’s bifurcation is also reflected in a widening gap in valuation premiums between AI and non-AI companies.”
Again, the United States continues to dominate the global venture-capital landscape, both in absolute terms and in attracting large-scale funding rounds. US-based companies also account for a significant share of global venture investment, particularly in AI, semiconductor design and cloud infrastructure. The concentration of capital in these areas reflects both technological leadership and ecosystem advantages, especially given that the US benefits from deep capital markets, strong links between research institutions and industry, and a regulatory environment that, while evolving, remains conducive to large-scale investments.
That said, this high concentration means that a significant portion of venture returns is now tied to a relatively small set of companies and themes, with expectations of AI’s potential being particularly embedded in valuations, fundraising assumptions and portfolio construction. Should those expectations fail to be met—either due to revenue growth continuing to underperform, costs remaining structurally high or margins ultimately being eroded by competitive dynamics—the resultant downward adjustment would feed directly into late-stage valuations, with many AI firms priced on forward-looking assumptions rather than current cash flows. A repricing at that level could then cascade through the capital stack, hitting earlier-stage rounds benchmarked against those valuations.
Beyond AI, a handful of additional sectors are showing relative strength in venture-capital funding. “Defense tech and spacetech continued to gain traction among VC investors in Q1’26, supported by both private capital and expanding government engagement,” KPMG stated in its “Q1’26 Venture Pulse Report”. “Persistent geopolitical tensions have accelerated interest in autonomous defense, space infrastructure, and dual-use technologies, with governments in multiple jurisdictions increasing support for domestic defense and space ecosystems.” But some sectors that were prominent during the previous cycle, including consumer applications and certain areas of fintech (financial technology), have experienced a pronounced slowdown.
As for Europe, a more complex picture emerges. The region has developed a stronger startup ecosystem over the past decade, with increased activity in fintech, climate technology and industrial innovation. However, funding levels remain well below those in the US, and the gap has only widened during the current cycle. Data from Crunchbase and KPMG suggest that European venture funding in 2025 remained subdued, with fewer large-scale rounds and a more cautious investment environment. As Europe’s single largest venture market, the United Kingdom continues to attract capital, particularly in fintech and AI, but fundraising conditions have tightened, with higher interest rates and a less active initial public offering (IPO) market having constrained both investment and exit opportunities.
Indeed, despite rates having largely headed south across the world in recent years, they nonetheless remain elevated compared with a decade ago. As such, they continue to influence discount rates, thereby reducing the present value of future cash flows and, in turn, valuations. By offering favourable yields to investors, high rates are also making alternative investments such as bonds more attractive, thereby affecting how firms allocate capital.
This is particularly visible in the exit environment, with IPO activity remaining below historical averages. As Conor Moore, global head of KPMG Private Enterprise, said of venture capital’s Q1 performance, the underperformance of recent weeks was “throwing a bit of a wrench into things, especially on the IPO front”. Moore added that there had been optimistic expectations at the start of the quarter of a steady stream of IPOs in the first half of the year. “That’s all very much in doubt now.”
The trajectory for the remainder of 2026 is likely to depend on several crucial factors. If interest rates continue to ease, that should support valuations and improve exit conditions. A more active IPO market would provide a release valve for capital, enabling greater recycling and potentially supporting new fundraising. At the same time, the concentration of capital in AI will likely persist, with investors continuing to prioritise areas in which technological change appears most significant, even if this leads to imbalances within the broader ecosystem.
More immediately, KPMG has forecast geopolitical developments—particularly ongoing conflicts and their impacts on energy prices and inflation rates—as “key factors” shaping VC sentiment in Q2. “AI is expected to remain the strongest area of venture investment, alongside defense tech, spacetech, and cybersecurity,” the professional-services firm noted. “While IPO activity may remain uneven, M&A is expected to play an increasingly important role as a path to exit as companies seek liquidity amid ongoing market uncertainty.”