Insights into the Q3-2025 VC Funding Landscape: AI's Grip, Zombie Funds, and the Shift to Direct Investments

As we navigate Q3 of 2025, the venture capital ecosystem continues to evolve rapidly. Drawing from recent data (e.g., PitchBook, Crunchbase reports) and conversations with investors and founders, here are the trends shaping funding:

AI dominance in investment: AI-driven companies have captured 64.1% of total VC deal value in H1 2025, with Q1 alone seeing over $80 billion globally—a 30% increase from the previous quarter. This focus has sidelined non-AI sectors, where deal volumes are down significantly, making it challenging for traditional tech startups to raise capital.

Increase of Zombie funds: U.S. VC fundraising declined 33.7% year-over-year in H1. Hundreds of VC firms are turning into "zombies" ( estimated 574 "zombie" firms a 50% increase Y-o-Y)—unable to raise new funds or invest. This ripple effect is hitting incubators and accelerators hard, forcing some to close doors.

Direct Investments from Alternative Sources: Private equity, limited partners, and family offices are increasingly bypassing traditional VC funds, and now account for about 31% of startup funding.

In pre-seed stages, the emphasis is on de-risking: investors demand tangible traction ; such as monthly recurring revenue ($10K-$20K in MRR) or proven customer validation.

Family offices, in particular, are filling early-stage gaps through co-investments and club deals (83% of their activity), offering more patient capital amid VC volatility.

For entrepreneurs the market continues to turn more conservative, with a "survival of the validated" mindset. VC deal values cooled in Q2 (down to $42.1 billion from Q1's peak), which underscores the need to prioritize objectives, and explore alternative paths for funding.