By: Steven Yang Head of Global Venture Investments at Schroders

Recent stock market volatility caused by a new AI challenger highlights how innovation is happening at pace on the world stage, which in turn provides compelling opportunities for venture capital investors.

On Monday 20^th January 2025, while the world’s eyes were trained on Washington and the inauguration of Donald Trump, Chinese start-up DeepSeek released the latest iteration of its generative artificial intelligence (AI) chatbot. And while Mr Trump kicked off his second term in the White House with a deluge of executive orders, the ripple effects from DeepSeek’s launch soon similarly began to make waves on markets.

We’ve written about the immediate response to, and ramifications for investors of, these events already. What is particularly interesting in a private equity context, is how these events underscore the broad, global innovation that is happening at pace in this most disruptive of sectors, much of it financed by venture capital (VC).

Beyond the headlines, it is the dynamism and innovation of start-ups with bold ambitions to disrupt the status-quo that is the main attraction of venture investing. It happens around the world, throughout market cycles, and offers the promise of generational opportunities that can turn into the very biggest investment wins.

OpenAI, the company whose AI models are most directly challenged by DeepSeek, itself began life as a small upstart start-up, albeit one with big ambitions and rich backers, among them Elon Musk and current CEO Sam Altman, himself a serial venture investor. At the end of January, and in spite of the market ructions, it was revealed the company is in talks for a new funding round that would value the business in the region of $300bn.

That may sound like a big number for a pre-profit business, but the potential of the technology is clear and era-defining. The same was true of companies that now make up eight of the top 10 most valuable public companies, with notable VC firms among their early investors.  These investments have generated phenomenal returns for the venture backers equating in many cases to three-figure multiples of the first institutional financing.

Sizing up the market

Of course, the venture market is far broader and deeper than the few household technology names that represent some of its biggest successes. Globally, $3.5 trillion was invested in venture capital between 2020 and 2024, according to data from Pitchbook. Meanwhile, large institutional investors have consistently directed 20-25% of their private equity allocation into venture capital.

Venture capital investing centres primarily around start-ups based in the top 20 innovation hubs globally, with around 70% concentrated around key cities in the US, China and UK. Key sectors are those that thrive on entrepreneurial disruption and innovation, including technology, ranging from the rapidly evolving field of AI through to enterprise software and cybersecurity; healthcare, focusing on life sciences and biotechnology; and financial services, especially technology-enabled innovation in areas such as payment solutions.

To put some numbers on where venture capital dollars are directed (see chart below), over the five years from 2020 to 2024 information technology accounted for the largest share of investment (35%) – and it generated by far the most ‘unicorns’, a term referring to start-ups valued at more than $1bn (50% of unicorn value distribution).

Notably, while AI represented only 3% of the overall investment total over the same period, it is a growing investment themes with an increasing share of unicorn value distribution (12%). Of the more than $100bn invested in the sector, $70bn has been invested since 2022. Healthcare and financial services are both similarly prominent areas of investment (12% and 11% respectively), and account for a similar share of unicorn value distribution (7% and 6%).

AI is a key investment theme with increasing share of value creation

Back to reality

The surge in AI investment over the past two years has defied a wider slowdown, which in truth has seen the market revert to more normalised levels after post-pandemic exuberance drove record activity in 2021. Company creation globally has reverted to 2018 levels, with 4,200 companies in 2024 receiving their first round of institutional financing (see chart below).

Company creation normalised to 2018 levels

On the fundraising front, approximately $108 billion in new venture capital was raised globally from investors in 2024, according to Preqin, which also represents the lowest annual total since 2018. However, according to Schroders Capital’s proprietary Fundraising Indicator, last year’s total was in line with long-term trends after several years of excess capital raising. Historically, our indicator shows that excess fundraising is associated with lower vintage-year returns.

Delving deeper into returns, the segment has historically performed strongly but has similarly fallen back since reaching a peak in 2021, in line with fundraising trends. Over the 20 years from the end of 2004 to Q3 2024 the Preqin Venture Index generally outpaced both the MSCI All World Total Return and S&P 500 (see chart below). Rolling performance has dipped below the S&P 500 since the latter part of 2023 during a period in which exit activity dried up and company valuations fell, although the index still remains materially above the MSCI.

Venture index returns have been strong over the long term

As an aside, while venture is the segment of private equity that can potentially provide the strongest returns, reliance on a small number of big winners in portfolios – our own data suggests less than 20% of portfolio companies generate more than 80% of value creation – also leads to higher performance dispersion.

Since 2009 and from a similar universe of 1,100 funds, more than twice the number of venture funds have generated a total return multiple (TVPI) in excess of 3x the capital initially invested compared to buyout funds, while the proportion that have generated a multiple of less than 1x is slightly higher. This suggests that venture in general has the potential to generate outsized returns, but could also reinforce perception of higher associated risks.

We believe these figures highlight that the key to investing effectively in this segment is to be highly selective over managers and strategies, and to secure access to top-tier funds that are often highly access restricted to new investors.

Returning to growth

Overall, these data points speak to a vibrant global market, but one which has seen a marked slowdown in activity in terms of fundraising, deal and exit activity since 2021 as an increase in rates dried up financing markets, put the clamps on strategic M&A and led to sustained stock market volatility.

However, there are expectations that the coming year will see a rebound, albeit one coming from a healthier base now that the heat has come out of the market. This could be driven first and foremost by an increase in exits, which would generate liquidity by increasing distributions back to investors and so providing new capital to invest.

According to analysis by Pitchbook, a trigger could be unlocking pent-up value held within star portfolio companies. More than half of all unicorns in venture funds globally are in the US – and around 40% of these, with an aggregated value of in excess of $1 trillion, have been in managers’ portfolios for at least nine years. This means fund managers are paying close attention to opportunities to optimise and crystallise value, and generate liquidity for investors.

Top 20 innovation hubs and unicorn distribution globally

_{Past performance is not a guide to future performance and may not be repeated. Source: Pitchbook, Schroders Capital, 2025. As of 16 January 2025. Top 20 innovation hub ranking based on capital invested into Series A financings for the period 2020–2024. Bay Area includes San Francisco, Palo Alto, Menlo Park, Mountain View, Emeryville and San Jose. In total, there are 1,246 Unicorns across the private market. Company logos shown represent select unicorns from respective hubs. Unicorns from regions not mentioned in graphic above include Africa and Middle East. Company headquarters based on Pitchbook. Unicorn defined as venture-backed private company with post-money valuation over $1 billion. Logos shown are the property of their respective entity.}

Against a backdrop of looser regulation (at least in the US) and potentially more accommodating public markets, especially if expectations of further rate cuts play out, there is potential for more of these companies to be acquired by strategic buyers, or to be listed – albeit uncertainty over trade policy is bringing renewed volatility and uncertainty to the IPO market. To the extent that this helps to crystallise values that were struck at the market peak, it could continue a valuation recovery that began last year and that would feed into performance.

Valuations, though, can be a double-edged sword, as entry prices for new deals can act as a brake on future performance if they are elevated. In this context, it is notable that valuations for earlier-stage fundraising rounds are lower than later-stage pre-IPO rounds and have seen less volatility over time.

Earlier stages have lowest entry valuations and less volatility

_{Past performance is not a guide to future performance and may not be repeated. Source: Pitchbook, Schroders Capital, 2024. 1. Early-stage defined as Seed to Series A rounds, early-growth defined as Series B-C rounds, and late-stage pre-IPO rounds defined as Series D and beyond rounds. Increase is for the period 2024 vs. 2018. 2. Median pre-money valuation by stage from 2015–2024.The views shared are those of Schroders Capital. Forecasts and estimates may not be realized.}

Areas of focus

At Schroders Capital, we have been active in the venture segment since 1997, with capabilities across the full investment lifecycle from primary commitments into new venture funds, to direct investments, co-investments and secondary purchases that add concentrated exposure to key portfolio companies alongside our fund manager partners.

Early-stage

We currently favour early-stage venture over later stage, where (as can be seen from the chart above), valuations have been much more stable and have generally avoided the price inflation seen in later stages, supported by more sustainable fundraising. Early-stage companies also benefit from a wider array of exit opportunities, including follow-on funding rounds and strategic sales, compared to later-stage venture which relies more heavily on public market listings.

Global approach

We continue to see the importance of a global approach that capitalises on innovation shifts across the top 20 innovation hubs, recognising that innovation is happening all over the world and that competition can come from anywhere. Specifically, we see a strong case to invest in companies within a strong, localised ecosystem and that are proven winners in their segment, with the potential to generate strong domestic returns over an extended period.

Technology and AI

As for sectors, technology is clearly a strong area of focus – and within this there are a growing array of opportunities in AI in particular. We have long-term view that generative AI has the potential to create significant economic impact and value creation opportunities, especially for early-stage investors.

We prefer a focus on companies developing infrastructure and application-based solutions to leverage AI technologies, over investments in companies developing ‘compute’, referring to the foundational processing infrastructure to train and run AI models. We are early investors in a number of leading foundation models and will be highly selective on investments in this area going forward, as a few market leaders have emerged.

Many VC-backed companies aiming for leadership across AI stack

_{Source: Schroders Capital, 2025. Companies shown are for illustration purpose only. Latest post-money valuations provided by Pitchbook. Logos shown are the property of their respective entity.}

Life sciences

Elsewhere, we see continuing opportunities in biotechnology therapeutics, especially supporting new clinical treatments for areas that are a growing area of focus within healthcare, such as obesity, immunology, oncology, and neurodegenerative diseases including dementia and epilepsy.

This is an area of the market that involves a host of idiosyncratic risks, given the costs and regulatory challenges involved, but which can equally offer lucrative exit opportunities, either via public markets or through sales to large pharmaceutical groups that see strategic M&A as a key route to building out their drug pipeline.

Last year was highly active for therapeutics M&A primarily focused on US-based clinical stage companies developing treatments for immunology, oncology and metabolic disease, with 15 of the top 20 exit events in 2024 valued at in excess of $1bn.

Venturing on

In a world that is increasingly defined by disruptive innovation, global venture is a compelling asset class that provides access to a world of opportunities – and 2025 may shape up to be a potentially strong vintage, with a rebound in deal and exit activity and a continued recovery in valuations driven by potential sales of portfolio unicorns.

At the same time, venture capital is not for the feint hearted – with a majority of returns being generated by a minority of investee companies, and a correspondingly wide return dispersion, this is a segment that can generate the very best returns, but that also comes with inherently higher investment risks.

A considered approach can help to manage these risks. This includes partnering with top-tier managers with proven track records, or emerging managers with demonstrated investment pedigree; investing into select sectors and sub-sectors that benefit from structural tailwinds, and that can do so on a global basis; and concentrating on earlier stages where valuations have been less inflated by exuberance and excess fundraising.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested