It’s no secret that we’re in a challenged market when it comes to venture funding. More specifically, startups are challenged to raise funding, due to less money to go around. That creates a buyers market for startup equity, which lessens their negotiating leverage and valuations…unless you’re an AI startup.

We’ll get back to the AI part in a bit, but the larger trend is notable because it’s a far cry from the Covid boom, when software startups enjoyed runaway valuations and ARR multiples, not to mention lots of negotiating leverage and long lines of suitors. Things have shifted dramatically in the other direction.

But where are we now, and what market signals can quantify the state of venture funding? To answer that question, we turned to our go-to thought leader for all things investing & finance, Circumference Group’s Luca Sechi. In a recent discussion with Localogy, he broke down several key trends and data points.

Here are our top takeaways, including data that Sechi has assembled from various sources…

On the Rebound?

One of the key factors noted above is the supply and demand imbalance in venture funding. Subdued funding appetites equal scarcity in venture dollars, and therefore a buyer’s market for startup equity. This contrasts the Covid software boom, during which the opposite was true, as noted

But the biggest question is, where’s the momentum? Historical evidence seems to point to a rebound in venture dollars deployed, and thus a move back towards leverage for startups seeking favorable deal terms. Specifically, the past two economic downturns (internet bubble and great recession) saw 9-10 quarters of declines in aggregate venture funding. Correspondingly today – after 8 quarters of declines in the current downturn – things seem to be rebounding.

However, there are several caveats and qualifications, which we’ll get into next…

The Bad News…

One of those caveats is that most funding inflows to the tech sector are going to AI companies. If you remove them from the equation, the health of the venture investing landscape looks bleaker. Among other sources, this trend is characterized by data from Y-Combinator that show that 80 percent of its latest cohort is made up of AI companies.

AI companies are also getting bigger valuations, according to Pitchbook. Because they are in high demand in investors’ eyes, they have more negotiating leverage, which drives up their valuations. That means that the supply & demand dynamics examined above don’t apply to many AI companies in terms of impacting their leverage.

The end result is that we are seeing fewer deals for larger amounts in the aggregate. And those big deals tend to be all about AI.

The New SaaS

So why do investors favor AI so much? Not only is it revolutionary, but it’s tangible and here today. That tangibility is quantified in the revenue growth already seen for many AI startups. Specifically, the average time horizon for AI startups to scale to a $5 million run rate is two years, according to Stripe. The corresponding timeframe for SaaS startups – the benchmark for investor-friendly tech and business models – is 37 months.

This essentially means that AI has taken the torch from SaaS as the investor darling of the venture market. SaaS was favored for its recurring and reliable revenue, as well as its high margins. But its aggregate growth has decelerated as it reaches maturity and market saturation. AI on the other hand has its own set of economic advantages, but more headroom and upside at this earlier stage of its lifecycle.

There are some cases where growth rates have reached even greater levels. For example, AI developer tool Cursor reached $100 million in annual recurring revenue in less than two years. This outpaces high-growth benchmarks such as OpenAI, Deel, and DocuSign.

Power Balance

Earlier, we noted that there were a few caveats to the good news that aggregate venture funding is growing. The first caveat was explored in the last few charts: AI’s outsized share of those venture dollars. Now it’s time to dive into the second caveat: greater venture inflows haven’t shifted the power balance to startups.

In other words, as noted earlier, fewer venture dollars being deployed means greater negotiation leverage, and thus better deal terms for investors – a buyer’s market for startup equity. One might therefore extrapolate that as venture dollars grow – as they have in the past few quarters – deal terms should approach greater favorability for startups.

Unfortunately, that hasn’t happened, as deal terms still remain largely investor-friendly. The reason goes back to the data on the last few charts. Most of the aggregate funding growth is going to AI startups. Those companies are indeed getting healthy valuations and deal terms due to their many suitors. Everyone else is still mired in the buyer’s market.

Focus on Fundamentals

What else are investors looking for? The rallying cry for public and private tech companies is a move towards greater efficiency and margins – a return to fundamentals. This trend can be seen all around us, both anecdotally and in quantifiable evidence. For example, Pitchbook reports that median margins have grown while median revenue growth has declined.

In fact, the two have intersected in 2025. This is particularly notable is its contrast to the operational norm during the Covid boom years. The paradigm then was to grow revenue at any cost and capture market share, with only secondary emphasis on profitability. The pendulum has now swung dramatically in the other direction.

Anectdotal Indicator

Further evidence for the “return to fundamentals” examined on the previous chart can be seen in tech world chatter. As evidence, Morgan Stanely measured the utterance of certain keywords at its Technology, Media & Telecom (TMT) conference, finding that “margins,” and “efficiency” were among the top terms. “AI” also got ample airtime, not surprisingly.

Of course, this is more of an anecdotal indicator of tech culture and executive mindshare than hard financial data. But it’s one of many signals indicating the shifting winds in the tech & media spheres.

Silver Linings

Lastly, though the startup world – outside of AI – is still in somewhat of a funding rut, there are a few silver linings. For one, private market valuations remain above historical norms, though they’re down from their high perch during the Covid software boom.

Specifically, private software ARR multiples (seen in series B and C rounds) eclipse public high-growth software multiples by greater than 3x. This is down from the 6x delta seen in 2022, but up from the 1.5x-2x range seen in the pre-Covid years.

As background – though there isn’t a one-to-one ratio in valuations, there is often a corollary between public and private market movements. When they move in the same direction, it can engender a healthier IPO market. That’s often a good thing as it brings liquidity to private markets and incentivizes investment and innovation – which altogether keep the economic wheels turning in startup land.

Header image: Josh Appel on Unsplash