The Quarterly Checkup
Q1 2025 Market & VC Landscape

Thursday, 05 June 2025 I Written by Jason Robertson

Market Overview

I opened last quarter’s report by saying, “Are we at the end of the long dark tunnel of the challenging post-COVID VC environment? Perhaps. But I feel we won’t know one way or the other until the end of 2025 and even then, it will require meaningful progress on a number of ecosystem fronts that remain very strained at this moment.” I concluded by saying, “As we step into 2025, the venture capital and digital health ecosystems are poised for continued evolution. While challenges remain, the foundations laid in 2024—from disciplined investing to strategic exits—offer a roadmap for sustainable growth. Stakeholders who balance caution with bold action will be best positioned to thrive in this complex, dynamic environment.” While nothing above is inherently wrong or untrue, in retrospect it lacks the bite and gravitas that has been the volatility and uncertainty of the first quarter of 2025, which has ushered in a period of significant upheaval in the US political and economic landscape. President Donald Trump’s swift and sweeping policy changes have had profound implications for financial markets, trade relations, and investor sentiment. Many question whether US hegemony is over and global perceptions of the US have deteriorated across the world and are now worse than views of China, according to an annual study of perceptions of democracy published recently.

One of the most consequential actions taken by the new administration was the declaration of a national emergency on April 2, 2025, leading to the imposition of broad-based tariffs. These measures included a flat 10% tariff on all imports, with additional levies reaching up to 50% on goods from specific countries, notably China, Canada, and Mexico. The immediate market reaction was severe: the Dow Jones Industrial Average plummeted over 1,300 points, and the S&P 500 experienced its largest single-day drop since the COVID-19 pandemic. The ensuing stock market crash wiped out more than $3 trillion in market value within days. The administration's aggressive trade stance led to retaliatory tariffs from affected countries, further exacerbating global trade tensions with tariffs on China hitting 145%. While a temporary 90-day reduction in tariffs was later negotiated with China, providing a brief respite albeit still high at >30%, the long-term outlook remains uncertain.

In tandem with trade measures, President Trump proposed a substantial $3.8 trillion tax cut package, which narrowly passed the House budget committee. This move, coupled with escalating tariffs, has raised alarms about the sustainability of U.S. fiscal policy. Moody's downgraded the US credit rating from AAA to Aa1, citing concerns over rising debt levels and interest payment obligations. Consequently, U.S. government borrowing costs surged past 5%, reflecting investor apprehension.

Analysts at Goldman Sachs have expressed skepticism about the net economic benefits of the administration's fiscal strategy, suggesting that the negative impact of tariffs may offset gains from tax cuts. The Penn Wharton Budget Model projects that the tariffs could reduce long-run GDP by approximately 6% and wages by 5%, translating to a $22,000 lifetime loss for a middle-income household.

The establishment of the Department of Government Efficiency (DOGE), led by Elon Musk, represents another significant shift in federal policy. DOGE aims to streamline government operations, with plans to reduce the federal workforce by 300,000 to 400,000 employees over the course of the year. While intended to cut costs, these measures have introduced additional uncertainty into the markets, particularly concerning the potential impact on public services and consumer confidence.

The first quarter of 2025 has been characterized by aggressive policy shifts under the Trump administration, leading to heightened market volatility and economic uncertainty. The interplay between expansive fiscal measures, protectionist trade policies, and administrative overhauls presents a complex landscape for investors. As the year progresses, close monitoring of policy developments and their economic ramifications will be essential for navigating this turbulent environment.

US Macroeconomic Landscape

From a monetary policy perspective, the U.S. Federal Reserve continued to hold its benchmark rate steady in May at 4.25–4.50%, following the 25-bps cut in December. This decision came despite headline inflation declining to 2.3% year-over-year in April (down from 2.4% in March), while core inflation (excluding food and energy) held steady from March at 2.8%, fueling market confusion and speculation over future rate cuts. The Fed said that risks of higher inflation and unemployment had risen, further clouding the U.S. economic outlook as its policymakers’ grapple with the impact of tariffs. The bond market responded with caution: the 10-year Treasury yield rose to 4.6%, pricing in long-term inflation expectations and expanded federal deficits tied to new fiscal stimulus initiatives. Longer-term bond yields have been climbing since the election, reflecting expectations that expansive fiscal stimulus, tax cuts, and protectionist trade measures (if enacted) will fuel higher inflation in the years ahead. In short, investors are trying to reconcile a potentially pro-growth, deregulation-oriented White House with the inflationary risks of its populist policy streak.

As alluded to earlier, equity markets also whipsawed throughout the quarter. The S&P 500 declined 7.8% from its January peak before partially recovering in March, finishing Q1 down 2.5% overall. Volatility, measured by the VIX Index, surged past 30 in early March before retreating slightly, marking its highest level since the regional banking crisis in 2023. Tech and consumer discretionary stocks were particularly hard hit, with many institutional allocators pausing deployment into high-growth private assets amid growing recession concerns. Deal makers are treading carefully – higher interest rates and volatile public markets mean less froth and more focus on fundamentals when evaluating new investments.

Global Venture Capital Landscape

 Back in venture capital, worldwide venture funding reached an estimated $113B in Q1 2025, up 17% quarter-over-quarter and 54% year-over-year – the strongest quarter globally since mid-2022 but that growth was driven almost entirely by late-stage and mega-deals. In fact, late-stage investment (Series C and beyond) skyrocketed ~30% QoQ (and +147% YoY) to about $81B, while early-stage activity fell to multi-year lows. The implication: most of the capital is being poured into a narrow set of large deals for mature companies, whereas funding for younger startups has dried up relative to prior years. It’s telling that North America alone accounted for ~73% of global venture dollars this quarter (versus ~59% in 2024), thanks to the outsized US mega-rounds, while regions like Asia and Europe saw flat or declining investment levels. The spoils are accruing to the biggest and “buzziest” players, especially in the US, while many others are left competing for a smaller slice of the pie.

In the US, Q1 2025’s data shows resilience – but also heavy reliance on outliers. Q1 dealmaking held up relatively well: an estimated 3,990 VC deals were completed, slightly above Q4 2024’s pace (+11%). Total deal value hit $91.5B in Q1 – up 19% from Q4’s $77.2B – to a level not seen since the 2021 boom times… yet that headline comes with a giant asterisk. One single transaction, OpenAI’s record-shattering $40B late-stage private funding round, accounted for a 44% chunk of the total quarterly deal value. If we strip out that one deal, the quarter’s funding would still look solid but not spectacular – on an annualized basis, without OpenAI we’d be on track for the 4th-highest VC year of the decade rather than a new record. It’s good to see big-money confidence in the market, yet we can’t ignore that much of Q1’s “boom” was concentrated in a few superstar companies.

Unsurprisingly, AI continues to be the dominant theme. Including the OpenAI mega-deal, roughly 71% of all U.S. venture dollars in Q1 went to AI-related companies. Even when excluding OpenAI’s $40B raise, AI startups still attracted over $25B, representing almost half of the remaining capital, more than double the sector’s historical average of ~20% over the past five years (though the definition of an “AI startup” has grown fuzzy as everyone adds a dash of AI to their pitch – as has been noted, it’s akin to how “internet company” lost meaning in the early 2000s). Notably, four of the five largest rounds this quarter, including Anthropic’s dual $4.5B raises, Infinite Reality’s $3B, and Groq’s $1.5B, were AI-focused, showing the sharp concentration of capital in generative and applied AI. This extreme concentration in AI is part of a larger “bigger is better” dynamic across the global VC landscape. 

What is uncertain at the moment for “AI” investments is whether the hype – and “inflated” valuations – are warranted. On one hand, I might argue that “AI-first” startups will grow faster using less capital with better margins than traditional ventures thereby justifying higher valuations (and presumably higher exit values). On the other hand, supply and demand would suggest that greater demand and relatively constrained supply has increased prices beyond fair values, which may normalize in the future.

Drilling into deal volume versus value, we see a moderate decoupling. By some measures, US deal counts were roughly stable or only modestly down from late 2024, even as the dollars spiked – meaning average deal sizes leapt higher, skewed by those few very large rounds. Investors continue a flight to quality, concentrating firepower on what they perceive as safer bets. Only 36% of total capital went into companies raising $10M or less, the lowest share since at least 2012. In contrast, deals exceeding $50M accounted for over 50% of total capital deployed, despite representing less than 7% of deal count. First-time financings, a proxy for startup formation, fell to 892 rounds totaling $3.8B, a 12% decline quarter-over-quarter and down 27% from Q1 2023. Seed and Series A activity, particularly, is under pressure: valuations remain stagnant, round sizes have compressed, and many founders are choosing to extend runways rather than raise down rounds.

In short, we’re seeing fewer, larger bets with a growing bias toward later-stage companies backed by established firms. While this strategy may help optimize DPI in the short term, it starves the pipeline of emerging innovation. Pre-seed and seed stage startups are struggling to get off the ground, and that dynamic is not isolated to the US — Canadian (more on this later) and European ecosystems are exhibiting similar patterns. Unless early-stage funding recovers, the long-term impact could be a gap in next-generation venture creation that becomes more visible by 2026–2027.

The exit environment remains the other big overhang. Liquidity for venture investors is still scarce. Notably, venture-backed IPOs were practically nonexistent in Q1, although Hinge Health’s recent successful IPO may offer an exception. Despite this, venture-backed IPOs were still rare in Q1. This marked the fourth consecutive quarter without multiple major tech listings and longest IPO drought since the post-dot-com era.

M&A continues to be the primary (sometimes only) path to exit, and here we did see a bit more activity: globally, Q1 saw 550 venture M&A deals, which is a 26% jump from the prior year’s pace (though just shy of the 563 deals last quarter). It was actually the strongest quarter for startup acquisitions by dollar value since 2021, with about $71B in disclosed global exit value. We also witnessed a few headline-grabbing takeovers that hint at pent-up demand among cash-rich acquirers. The standout is Google’s planned $32B acquisition of Wiz, a cloud cybersecurity unicorn – a deal that, if finalized, would mark the largest private-company buyout ever. In total, a dozen VC-backed companies got acquired for $1B+ in Q1 (including big names like Ampere and health-tech firm Modernizing Medicine). These are the kinds of exits the ecosystem desperately needs more of.

There are even early signs of life in the IPO pipeline: at least six startups filed confidentially with the SEC during the quarter in sectors like AI infrastructure, crypto exchanges, and defense tech, suggesting some pre-positioning for Q3/Q4 debuts if conditions stabilize. Still, we shouldn’t get ahead of ourselves. One quarter doesn’t make a trend, and many “filed” IPOs could remain on the shelf – as they did in 2024 – if market volatility returns. For now, liquidity events remain episodic, not systemic. The downstream impact is clear: 12-month VC distribution yields sit at ~6.5% of NAV, well below the 10-year average of 17.1%. This continues to suppress LP re-commitment activity, especially for emerging managers. New fund formation hit a 10-year low in Q1, and unless the exit environment materially improves, we expect deployment timelines to stretch and follow-on reserves to dominate capital planning through at least mid-year.

Amid this uneven landscape, digital health had an encouraging start to 2025. After a rough 2024, US digital health funding bounced back notably in Q1. Venture funding for digital health companies totalled $3.0B across 122 deals this quarter, which is a substantial rise from the mere ~$1.8B in Q4 2024 and even slightly above the ~$2.7B raised in Q1 2024. Year-over-year investment ticked up for the first time in nearly two years. This rebound came despite a lower deal count from a year ago (investors did fewer deals on average, but put more money into each) – in fact, the average deal size jumped to about $24M, up from ~$15M last quarter. While appetite for smaller seed checks remains low, investors are willing to write bigger tickets for companies they have high conviction in. It’s worth emphasizing the role of AI in digital health’s resurgence. Many of the quarter’s largest deals were explicitly AI-driven health startups – for example, Hippocratic AI’s $141M Series B (one of the largest Series B rounds, aimed at healthcare-specific large language models).

By deal count, early-stage startups (Seed, Series A and B) made up the majority of rounds (~83% of all deals), which is similar to last year’s share. But the narrative in Q1 was driven by the return of large, late-stage financings that had been scarce in 2023. The quarter saw several big-ticket raises that signal renewed confidence in mature digital health companies – most notably Innovaccer’s $275M Series F and Abridge’s $250M Series D, both announced in Q1. These are sizable sums that megafunds and crossover investors put into industry leaders. In fact, although only five deals in Q1 were Series D or later, this small cohort pulled up the median late-stage round size to ~$105M – nearly double the median Series D+ size from 2024 (about $55M). Clearly, late-stage “mega-rounds” are back on the menu for digital health, even as the overall market remains selective.

To thrive in this climate, startups and investors are adapting their strategies. One such strategy is increased strategic M&A – what Rock Health calls “tapestry weaving.” Rather than relying solely on organic growth, startups are using acquisitions to fill product gaps and expand their offerings. 46 digital health M&A deals were tracked in Q1, and 67% of those were startups acquiring other startups (as opposed to larger incumbents doing the buying). This is a jump from roughly ~53% last year, indicating a wave of peer-to-peer consolidation. 

Another focus is on building modular, flexible tech stacks. Companies are architecting their platforms to be API-friendly and AI-ready, so they can quickly integrate new capabilities. A great example is Lumeris’s newly introduced “Tom” platform, which leverages the capabilities of 60+ different large language models (LLMs) depending on the use case – an AI-driven approach to keep their solutions adaptive. We’re also seeing an emphasis on platform and channel partnerships: instead of trying to do everything alone, digital health firms are partnering with incumbents to get distribution and scale. For instance, in Q1, pharma giant Eli Lilly brought in digital health partners for its GLP-1 obesity drug ecosystem via the Lilly Direct platform, and Teladoc announced integrations to expand its chronic care programs – moves that essentially plug startup solutions into larger platforms. Rock Health noted the importance of engaging with disruptors – even incumbents are now proactively aligning with up-and-coming health tech challengers (e.g. Labcorp investing in at-home testing startup Teal Health’s $10M round as a hedge against its own traditional services). The common thread in all these tactics is agility: whether through creative M&A, strategic partnerships, or embracing new tech like AI, the winners in digital health are those leapfrogging over the barriers that stymied others in 2022–2023.

On the exit side, reality remains sobering. M&A activity, while improved, is largely comprised of small tuck-in acquisitions as noted above – we did not witness any blockbuster digital health exits in Q1. However, in a notable shift, Hinge Health officially went public as of the time of writing, marking a significant milestone for the digital health sector. This move is a sign of growing confidence, but still a relatively rare occurrence in the current climate. As for IPOs, the “winter” of the digital health market hasn't completely thawed with several unicorns continuing to hold off on public offerings; however, some, like chronic care provider Omada Health, have proceeded with filings in early Q2 in anticipation of an H2 IPO. For now, digital health VCs will need to remain patient and hands-on, supporting their portfolio companies through this period of modest liquidity. The tone is cautiously optimistic: Q1’s funding momentum is a welcome change, but sustainability is the question – one quarter’s data is encouraging, yet we’ll be watching whether it holds up in the face of broader economic cross-currents.

Canadian VC Highlights

Turning to Canada, the venture environment in Q1 2025 mirrored many of the global trends, although on a smaller scale and with a few uniquely Canadian wrinkles. Total VC investment in Canada reached C$1.26 B across 116 deals in Q1. This represents a decline from the unusually strong Q4 2024 (which was held up by a couple of mega-deals), but is actually on par with the first quarters of 2023 and 2024 by dollar value even as the deal count has slipped a bit.

As elsewhere, later-stage deals are accounting for a disproportionate share of capital: in Q1, Series C and D rounds made up only 11% of Canadian venture deals but captured 28% of the total dollars invested. (For context, those figures were just 5% of deals and 22% of dollars in Q1 2023 – so the tilt toward later-stage has become much more pronounced.) Conversely, the pre-seed and seed segment has continued to shrink, which is an increasingly worrying sign. Early-stage activity in Canada is now at its lowest level since 2020. In fact, the number of pre-seed and seed deals fell by another ~25% just since last quarter, a sharp quarter-over-quarter drop that underscores how much the bottom of the funnel has weakened. These very young companies are the pipeline for future Series A/B and beyond – so the current slowdown at the foundation is a red flag for the long-term health of the ecosystem. We need to pay attention here: a “missing generation” of startups born in 2023–2025 due to funding scarcity could mean fewer scale-ups in 2026–2028. The Canadian innovation economy we’ve worked hard to build is only as strong as its incoming crop of founders, and right now that crop is smaller than it should be.

Geographically, Canadian venture investment remains highly concentrated in the traditional legacy tech hubs. Ontario and Quebec together accounted for about 79% of all VC dollars in Q1 — with Ontario accounting for $694M across 46 deals (55% of dollars, 40% of deal count) and Quebec receiving $301M across 30 deals (24% of dollars). The remainder of activity was distributed thinly: Alberta ranked third by capital with $140M, while British Columbia followed with $80M, despite leading in deal count outside Ontario/Quebec. This reflects a reversion to the mean after outlier events in 2023–2024 (e.g., Clio’s record round in Vancouver), and underscores that VC activity outside of the major hubs remains sporadic and under-capitalized. At a city level, Toronto, Montreal, Edmonton, and Calgary dominated deal flow, reaffirming the centralization of Canadian startup funding. Over 90% of Q1 dollars were deployed in just four provinces, with Toronto and Montreal alone likely representing over 60% of national capital — a trend consistent with the past five years but increasingly problematic for regional innovation ecosystems.

The broader climate for exits in Canada remains challenging. The absence of any IPOs persists; not a single Canadian venture-backed company went public in Q1. The exit that Canadian VCs are getting mostly comes via M&A, which itself has been sluggish. Q1 saw only seven exits nationally, all via acquisition and most were undisclosed or sub-$50M in deal value. Cross-border and domestic acquirers alike have grown cautious, thanks to the same macro uncertainties discussed earlier (global trade tensions, tariff threats, and supply chain disruptions are certainly felt by Canadian companies and their potential buyers). There have been a few small-to-midsize acquisitions of Canadian startups, but nothing on the scale that materially returns capital to funds. As a result, Canadian VCs face the same liquidity logjam as their US counterparts – maybe even more so, since our market hasn’t seen a major tech IPO since 2021. This is translating into more conservative behavior among Canadian investors: firms are slowing deployment pace, reserving capital for follow-ons, and focusing on their portfolio rather than aggressively chasing new deals. 

Looking Ahead

In summary, Canada’s VC ecosystem is in a cautious holding pattern. Later-stage companies with solid traction can still raise money (often from US or international investors co-investing alongside Canadian funds), and foreign interest in top Canadian startups remains evident. But the foundational tiers of the ecosystem are under strain, and that will require attention. Looking ahead, a few things would help turn sentiment around: clarity on trade policy (so companies can plan without the tariff overhang), some high-profile exits or IPOs to prove liquidity is attainable, and perhaps supportive measures from policy-makers to “enable capital formation” and tech growth (areas where groups like CVCA are actively advocating).