Venture capital and AI investment trends — key signals from “KPMG Venture Pulse Q2 2025”
Oct 21, 20254 min readMarket at a turning point
Global venture investment dropped to $62.5 billion in Q2 2025, down 20% from the previous quarter and 44% year-over-year, marking the weakest period since 2019. Yet within this contraction lies a strong pivot: AI startups captured $25.4 billion, or 41% of total funding.
Rather than signaling decline, this represents a disciplined rotation toward verifiable innovation. Investors are moving away from growth-at-any-cost strategies toward companies that combine efficiency, defensibility, and measurable impact. The result is a more selective, more strategic market—one that prizes data integrity and long-term scalability over speed.
Funding reset, strategy realignment
High interest rates, valuation resets, and a continued freeze in public exits have reshaped the venture landscape. Deal volume fell 28%, and mega-rounds exceeding $100 million dropped by 32%, reflecting a widespread focus on capital efficiency.
Average deal size shrank by 17%, confirming a flight to early-stage precision rather than broad diversification. Investors are increasingly rewarding businesses with profitability visibility, disciplined governance, and clear paths to sustainable growth.
The dual-layer investment landscape
Layer 1: retraction and recalibration
Tight liquidity has made continuation funds a crucial mechanism for managing longer holding periods. Many investors are taking a more active operational role in their portfolios, helping companies reduce burn rates, clarify metrics, and strengthen financial controls.
This shift represents a wider reset: value creation is being redefined through operational quality and intellectual property strength, not just market expansion.
Layer 2: AI as productivity infrastructure
AI now functions as the structural layer driving the next phase of growth. Corporate venture arms were involved in 38% of AI deals, a record share, showing how enterprises are taking the lead in applied AI deployment.
Investment is concentrating on GenAI platforms, data infrastructure, and healthcare AI, emphasizing AI’s role as productivity infrastructure rather than standalone innovation. The focus is moving from flashy product launches to systems that improve accuracy, decision-making, and output efficiency.
Geopolitics and the new investment geography
Global capital allocation is shifting in response to trade policy tensions and national technology strategies. US tariff uncertainty has cooled funding in export-oriented sectors like manufacturing and transportation. At the same time, China and Japan are steering investments toward domestic industries, seeking to insulate their markets from global volatility.
Across Europe and Canada, public-private initiatives are laying the groundwork for long-term competitiveness:
- EU Startup & Scaleup Strategy: a €10 billion fund designed to strengthen independence in AI, cybersecurity, and cleantech.
- Germany’s €500 billion Defence & Infrastructure Fund, with roughly €100 billion earmarked for the energy transition and climate tech.
- Canada’s $300 million AI Compute Access Fund, aimed at making computing resources more accessible to smaller firms.
Together, these programs signal a decisive move toward technology sovereignty—building innovation capacity within national borders. For global investors and founders alike, this means adapting to localized innovation ecosystems and ensuring compliance with diverging data and AI regulations.
Infrastructure: the bottleneck and the battleground
The current investment wave revolves around data centers, chip manufacturing, and model-layer architecture. Infrastructure has become both the constraint and the opportunity.
The US strengthened its leadership through large AI infrastructure rounds, while China’s 14% quarterly rebound was largely driven by semiconductor and state-aligned tech investments. India and Japan continue to build momentum in robotics and automation, while EMEA recorded its weakest funding levels since 2019.
As capital consolidates, infrastructure readiness—not product design—will determine competitive advantage in the next two years.
Converging sectors and dual-use innovation
Two unexpected winners emerged this quarter: defencetech and spacetech. Both attract sustained funding due to their dual-use potential, serving commercial and government markets alike.
Startups developing satellite-based analytics, autonomous systems, or advanced materials are benefiting from their ability to diversify revenue streams while aligning with national security and supply chain agendas. This synergy between sectors illustrates how innovation and resilience are becoming interdependent themes in the new capital cycle.
Risks reframed for decision-makers
| Key risk | Impact | Likelihood | Strategic note |
|---|---|---|---|
| Liquidity Constraints | High | High | Exit delays extend fund lifecycles; continuation vehicles ease short-term pressure. |
| AI Overreach | High | Medium | Insufficient data maturity inflates valuations and causes model instability. |
| Regulatory Divergence | Medium | Medium | Differing AI frameworks across the US, EU, and China complicate scaling. |
| Talent Scarcity | Medium | High | Advanced AI skills remain costly, pushing startups to automate or outsource. |
| Data Localization | High | Medium | National AI rules are driving infrastructure costs higher and restricting model training flows. |
The overarching signal: discipline, compliance, and transparency now carry more weight than speed of growth.
Forward strategy: 2025–2026 playbook
- Reallocate funding toward infrastructure-heavy and productivity-driven AI verticals.
- Integrate IP defensibility and data integrity into due diligence frameworks.
- Reposition corporate partnerships around shared model governance and regulatory adaptation.
- Reevaluate valuations using sustainable revenue multiples rather than momentum benchmarks.
- Diversify exit scenarios, leveraging private secondary markets while IPO windows remain limited.
The most resilient players will be those who can transform capital efficiency into market resilience, balancing near-term discipline with long-term innovation readiness.
Outlook: from contraction to maturity
The KPMG Venture Pulse Q2 2025 does not describe a collapse—it outlines a rebalancing of global innovation. The venture ecosystem is shedding excess and refocusing on capital quality, strategic autonomy, and data-driven ROI.
As trade and technology policies reshape markets, the next growth cycle will likely emerge from productivity-led AI, cleantech, and infrastructure innovation—areas where governance, transparency, and resilience align.
By mid-2026, the firms that invested in these foundations today will define the next generation of scalable growth.
Source attribution
Based on data and analysis from KPMG Venture Pulse Report Q2 2025
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