- Capital Concentration Reaches Historic Levels
- AI Investment Surge Creates Sector Imbalances
- Geographic Opportunities and Challenges
- Rising Valuations and Market Dynamics
- Strategic Implications for R&D-Focused Companies
- The Case for Non-Dilutive Funding
- Optimizing Capital Strategy for the Current Environment
The second quarter of 2025 delivered a tale of two markets for venture capital, with artificial intelligence (AI) continuing its unprecedented run while traditional sectors face mounting headwinds.
According to the latest data from PitchBook and Crunchbase, AI startups captured 53 percent of all global venture capital dollars in the first half of 2025, with that percentage jumping to 64 percent in the United States. Meanwhile, global venture funding reached $91 billion in Q2 2025, up from $82 billion in Q2 2024, signaling a recovery that remains heavily concentrated in AI infrastructure and applications.
For founders, startups, and scale-ups operating in research and development-intensive sectors across the United States and Canada, these trends present both opportunities and challenges that demand strategic adaptation in capital planning.
Capital Concentration Reaches Historic Levels
The venture capital landscape has become increasingly bifurcated, with nearly a third of all venture capital investment in Q2 going to just 16 companies that raised funding rounds of $500 million or more. This concentration is unprecedented in modern venture history, with mega-deals dominating the funding environment in ways that weren’t seen even during the dotcom boom.
Scale AI’s $14.3 billion funding round in Q2 exemplifies this trend, representing one of the largest venture rounds on record. Such massive fundraises are reshaping the competitive landscape, creating significant advantages for companies that can access this scale of capital while potentially disadvantaging innovative startups that rely on more traditional funding pathways.
The implications for R&D-focused companies are significant. Just 12 US venture firms raised more than 50 percent of the total value of capital in the first half of 2025, with the top 30 firms raising 74 percent of all capital raised. This concentration means that access to venture capital is increasingly dependent on connections to elite-tier firms, making alternative funding strategies more critical than ever.
AI Investment Surge Creates Sector Imbalances
While AI companies continue to attract unprecedented investment levels, the funding environment for other innovative sectors presents mixed signals. AI dealmaking moderated in Q2 2025—cooling off from a record-setting Q1—but activity remained historically elevated, with horizontal platforms capturing the majority of capital while vertical applications drove deal volume.
AI and ML startups are taking 38.4 percent of the $30 billion total in US and European venture debt funding so far this year, demonstrating how the AI boom extends beyond traditional equity financing. This trend is driven by the substantial infrastructure costs associated with AI development, particularly around compute resources and GPU acquisition.
For non-AI companies, particularly those in traditional R&D sectors like advanced manufacturing, clean technology, and biotechnology, the funding landscape requires more strategic navigation. Global venture funding to cybersecurity surged to $4.9 billion in Q2, pushing H1 to the highest half-year level in three years, showing that certain sectors outside AI can still attract significant investment when they demonstrate clear value propositions.
Geographic Opportunities and Challenges
The funding concentration isn’t just sectoral—it’s also geographic. While the United States continues to dominate AI investment, venture funding in Latin America rose 13% quarter over quarter and 16% year over year, led by a burst of investment in Mexico. This geographic diversification presents opportunities for companies willing to consider alternative markets for expansion or partnership.
For Canadian companies, the landscape presents both challenges and opportunities. The concentration of AI funding in the United States creates competitive pressure, but it also opens doors for Canadian companies with strong AI components to access cross-border funding. The key is positioning R&D innovations within the broader AI narrative while maintaining focus on core business fundamentals.
Rising Valuations and Market Dynamics
Median pre-money valuations for AI companies reached $25 million in 2025, up from $15 million in 2024, reflecting intense competition among investors to secure positions in promising AI ventures. However, this valuation inflation creates challenges for companies that must deliver exceptional growth to justify their pricing.
Venture-growth valuations soared to new highs, up 228 percent year-over-year, signaling intense competition to back scale-ready infrastructure leaders. For R&D-intensive companies, this environment demands clear demonstration of scalability and market potential to compete effectively for investor attention.
Strategic Implications for R&D-Focused Companies
The current funding environment requires R&D-intensive companies to adopt more sophisticated capital strategies. First-time fund managers raised a combined total of just $1.8 billion in 2025, while established funds capture the majority of available capital. This dynamic means that companies need to diversify their funding approaches beyond traditional venture capital.
Startup M&A showed strength, totaling $7.2 billion across 172 exits in Q2 in Europe, suggesting that strategic acquisitions remain a viable path for companies with strong technology platforms. For companies building innovative solutions, positioning for strategic acquisition may become an increasingly important consideration.
The Case for Non-Dilutive Funding
Given the concentrated nature of current venture markets, innovative companies must explore alternative funding mechanisms to support their R&D efforts. Government R&D tax credits represent a particularly attractive source of non-dilutive capital that can significantly extend runway and accelerate development timelines.
In Canada, the Scientific Research & Experimental Development (SR&ED) tax credit program provides substantial support for companies investing in R&D activities. These credits can recover significant portions of R&D expenditures, effectively reducing the cost of innovation while preserving equity for founders and early investors.
Similarly, the United States offers various federal and state-level R&D incentives that can provide meaningful capital for qualifying activities. The Research and Development Tax Credit allows companies to claim credits for qualified research expenses, including wages, supplies, and contract research costs.
For companies operating across both markets, the combination of Canadian and US R&D incentives can create powerful funding synergies that complement traditional venture capital. This approach becomes particularly valuable in the current environment where venture funding concentration makes traditional paths more challenging to navigate.
Optimizing Capital Strategy for the Current Environment
The data suggests that successful companies in today’s environment will need to employ multi-faceted capital strategies that combine traditional venture funding with alternative sources. R&D tax credits serve as a foundation that reduces the overall capital requirements while extending development timelines and reducing dilution.
For companies with AI components, positioning technology within the broader AI narrative can improve access to venture capital, even if AI isn’t the core business focus. However, companies should maintain realistic expectations about valuations and be prepared for increased scrutiny around growth metrics and scalability.
