Big AI bets divide venture capital, leaving smaller funds behind

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Emerging firms — those that have formed three or fewer funds — raised about US$62 billion last year and are on track to raise a similar amount this year, according to data from PitchBook. That’s about a 60 per cent drop compared with the US$163.4 billion they raised during the pandemic funding peak in 2022. Experienced managers reeled in US$84 billion last year, a third of what they raised in 2022.

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And fund performance is becoming more uneven.

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The gap between the best- and worst-performers has more than doubled for 2024 vintages compared with those formed from 2017 to 2021, according to Carta data. The top 10 per cent of 2024 funds gained 49.3 per cent in the fourth quarter of last year, while the bottom quartile lost 17.4 per cent, the data show.

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“The general take is people want to reward performance,” said Patrick Murphy, a founder of Tapestry VC. “I think LPs want to reward people who saw opportunities for liquidity and took them, thankfully we’re in that group.”

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Fin, an early investment of Tapestry’s, recently agreed to an acquisition by Salesforce Inc. for US$3.6 billion, helping the VC firm launch its third fund with $80 million. The company develops AI-powered customer service agents.

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Zombie unicorns

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The shift to AI is impacting a generation of startups in other sectors that attained valuations of US$1 billion or more in the last five years, but now have limited options to exit and return cash to investors. The industry calls these “zombiecorns” — companies that don’t have the growth to support their valuations and are struggling to attract buyers or to list.

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The effect is particularly visible among enterprise software startups, which investors fear could be wiped out by tools from OpenAI, Google and Anthropic.

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Personio, a German HR software company last valued at US$8.5 billion in 2022, is expected to raise a new round at about half that valuation, according to people familiar with the matter.

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Financial technology, which ballooned during and after the COVID-19 pandemic as customers moved to digital banking and shopping online, has also bifurcated.

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During the peak years, public listings for companies such as Coinbase Global Inc., trading platform Robinhood Markets Inc. and others offered investors a blueprint for successful exits and drove funding to emerging players. Funding for fintech startups hit more than US$100 billion globally in 2021, according to PitchBook.

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Only a handful are still thriving — mostly those that can prove scale in the sector. Stripe Inc., which helps businesses accept payments online, has reached a US$159 billion valuation. It processed US$1.9 trillion of payments in 2025, up 34 per cent from the prior year. Digital bank Revolut Ltd. has won the crown for Europe’s most valuable private startup, is profitable and plans to list some time in the next few years.

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“The neobank, underbanked story of 2021 is not going to give the story of a Databricks or Stripe today,” according to Kyle Stanford, director of U.S. venture capital research at PitchBook.

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Revolut’s U.K. rival Monzo Bank Ltd. weighed a secondary share sale last year but has since dropped the effort, according to people with knowledge of the matter. Despite being profitable, the company is a fraction of Revolut’s US$115 billion valuation.

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Another neobank, Atom Bank, has failed to attract suitable bids for a buyout, people with knowledge of the matter said.

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Representatives for Monzo and Atom Bank declined to comment.

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Fintech investors are accordingly feeling the pain. In February, a listed U.K. venture fund, Chrysalis Investments Ltd., said it was winding down after years of under-performance that forced the fund to write down the value of its portfolio. Chrysalis wrote down stakes in companies including U.K. digital bank Starling Bank and insurance technology company Wefox.