CTRL-ALT-DELETE: What the 2025 reset means for investors and founders alike

“And no, we don’t know where it will lead. We just know there’s something much bigger…”

- Steve Jobs, Co-Founder/CEO, Apple

As we enter 2025, the venture capital landscape continues its reset, shaped by the transformative impact of artificial intelligence and the lessons learned from the market conditions of 2024. In this blog post, I examine the emerging trends and key takeaways that I believe will define the year ahead for both investors and startup founders.

So, let’s get to it.

Learning from 2024's Market Realities

The venture capital market of 2024 exhibited a period of strategic recalibration. After the irrational exuberance of previous years followed by the brutal rebalancing of limited partner capital allocations to private markets, venture capital and private equity investors were forced to get back to basics. Most, if not all, adopted a more measured approach to deal making, focusing on sustainable growth metrics, rational cash burn and demonstrable paths to profitability. The era of "growth at all costs" gave way to emphasis on unit economics and operational efficiency.

At the same time, the AI sector remained largely immune to this same rationality. The continued rise of Generative AI commanded significant attention and saw investors willing to bid up valuations of anything AI-adjacent in an effort to garner a piece of the next OpenAI or Anthropic. Towards the end of 2024 however, we did witness investors slowing down the initial rush and taking a more measured evaluation of real technological advances and sustainable business models of new market entrants. This reset forced startups to become more capital efficient, leading to innovative approaches in model development and deployment that require less computational resources and by extension – cash.

2024 also revealed that having sophisticated AI models wasn’t enough. The real competitive advantage will come from proprietary data and feedback loops. Investors began prioritizing startups with clear strategies for building and maintaining data moats, especially in regulated industries where data access presents significant barriers to entry. Our investment in Groopit (www.groopit.co) is a great example of this in action.

Market Dynamics in 2025

The reset that’s finally taking shape in 2025 isn't merely cyclical – it represents a fundamental evolution in how innovation is funded and how value is created in the private markets. The interplay between traditional venture capital approaches and new investment areas will reshape the landscape, creating both opportunities and challenges for investors and founders alike. A few of the market dynamics I anticipate playing out over the course of this year include the following:

1.     Rebound in IPO Activity: There is a strong expectation that the IPO market will reopen in 2025, potentially leading to high-profile IPOs that will provide much-needed liquidity to the venture capital ecosystem. This resurgence is particularly anticipated due to historical trends following U.S. elections, which often see increased IPO activity. The jury is still out on this one however so tread lightly.

2.     Retail Investors Enter the Fray: Private markets, once the domain of institutions, are now opening up to individual investors through registered investment advisors and the like. This could help flood the market with capital but also shift the dynamics in terms of general partner (GP) alignment and regulation.

3.     Early-Stage Investment Growth: The investment pace in early-stage companies is expected to increase, driven by the emergence of solo general partners and angel funds. These developments are likely to foster more specialized investment strategies, benefiting startups with tailored support from knowledgeable investors

4.     Focus on Hard Tech and AI: As software becomes commoditized, there is an anticipated surge in VC dollars toward hard technology sectors, including biotechnology, robotics, hardware and deep tech. Additionally, AI startups targeting enterprise solutions will face a critical year; many are still in the experimental phase and may struggle to transition into core business spending. Others, especially those that are vertically focused, could reach their inflection point, driving greater growth and optionality. Our investment in QorusDocs (www.qorusdocs.com) is an example of this for the legal market vertical.

Investment Trends in 2025

Looking ahead, it’s clear that many industries are ready for some big changes, driven by technology advancements and shifting consumer habits. We’re talking about everything from AI and wearable tech changing how we shop and manage our health to sustainable practices influencing our choices and immersive experiences transforming how fans connect with their favorite teams. Keeping an eye on these trends will be crucial for tapping into fresh opportunities and staying competitive in this fast-evolving landscape.

1.     Retail

-       Artificial Intelligence (AI): AI will increasingly serve as a critical tool in retail, enhancing sales, product curation and recommendation, and operational efficiency. It is projected to create a $9.2 trillion opportunity[1] by the end of the decade, with applications in personalized shopping experiences and loss prevention.

-       Supply Chain Innovations: Retailers are diversifying their supplier bases and investing in regionalization to mitigate risks associated with global supply chains. This shift will lead to increased disruptions and innovations in supply chain management. This will also have a knock-on effect for sustainability as companies are already looking into alternative fuel solutions for last mile delivery. Think hydrogen fuel cell technology such as Hyzon (www.hyzonfuelcell.com).

2.     Transportation

-       Autonomous Vehicles: The development of self-driving cars and related technologies is anticipated to disrupt traditional transportation models, impacting logistics, personal mobility, and urban planning.

-       5G Connectivity: The maturation of 5G technology will facilitate new applications in transportation, including real-time data processing for autonomous systems, enhancing safety and efficiency.

3.     Sustainability

-       Sustainable Practices: As consumers become more selective about their purchases based on sustainability commitments, brands will need to innovate continuously to align creative marketing with authentic sustainability efforts.

-       Renewable Energy Solutions: Investment in renewable energy technologies is expected to accelerate, driven by regulatory changes and increasing consumer demand for sustainable energy sources.

4.     Sports/Media Tech

-       Fan Engagement Technologies: Innovations aimed at enhancing fan experiences, such as digital equity models and immersive viewing environments, will reshape how fans interact with sports.

-       AI in Production and Broadcasting: The integration of AI in media production is expected to streamline operations and enhance content delivery, making broadcasts more engaging. Our portfolio company Tagboard (www.tagboard.com) is a leader in this space.

Challenges and Opportunities

Just as 2025 expects to usher in a wave of opportunities for innovation and growth, it will also present us with its share of challenges that investors and entrepreneurs must navigate carefully. Economic uncertainties, including fluctuating interest rates and geopolitical tensions, are likely to impact fundraising efforts and investment strategies. Additionally, the slow pace of mergers and acquisitions may create hurdles for startups seeking exits or partnerships. As the market evolves, stakeholders will need to remain agile and resilient, adapting their approaches to overcome these obstacles while capitalizing on the potential for disruption in their respective industries.

1.     M&A Activity Could Remain Slow: Despite the IPO rebound noted above, significant mergers and acquisitions (M&A) are not expected until late 2025, as market conditions remain challenging. This could have a dampening impact on limited partners willingness to deploying capital until they see improved metrics related to paid-in capital distributions.

2. Continuation Vehicles Rise: Continuation vehicles (CVs) will become a more common exit strategy for private equity sponsors. According to Cambridge Association’s analysis, managers are using CVs to hold on to their best assets while also giving liquidity to limited partners. Investor interest in CVs is also growing, suggesting they will be an even more important exit route for both private equity and venture capital.

3.     Regulatory Navigation: The evolving regulatory landscape around AI will create both challenges and opportunities. Startups that can build compliant-by-design solutions and help others navigate regulatory requirements will find fertile ground for growth and investment.

4.     Global Competition: The AI landscape is increasingly global, with significant innovation happening across multiple regions. Successful venture strategies will need to account for international competition and opportunities for cross-border collaboration.

Looking Forward

The lessons of 2024 have set the stage for a more sustainable and thoughtful approach to early-stage startup and investment in general. The future of the entrepreneurial ecosystem lies not just in identifying promising technologies such as Generative AI, but in building sustainable businesses that can deliver real value quickly. The winners will likely be those who can:

-       Demonstrate practical applications with clear ROI

-       Build efficient and scalable operations

-       Navigate regulatory requirements effectively

-       Show clear differentiation in increasingly crowded markets

There you go. My thoughts for how 2025 will shake out for investors and founders. I could be spot-on, or completely crazy, or somewhere in between. But you can’t deny, it promises to be an interesting year.  So, let’s start building.

#ONWARD

[1] IHL: Retail’s AI Revolution. (https://www.ihlservices.com/product/retails-ai-revolution/)