The first quarter of 2026 looked great for venture capital and private equity firms on the surface, with record dollars invested and record exit values, far beyond any previous quarter–$267 billion in investments made and $347 billion in exit value. But this is very misleading. 73% of the deal value and 87% of the exit value was in five transactions in each category. An AI firm raised $122 billion of the total investment in one deal. SpaceX acquired xAI for a huge amount–$250 billion, driving the total transaction value. As you might imagine, as these deals show, the value of transactions is due to the obsession with artificial intelligence. Underneath this, most startups and emerging growth companies are struggling to get adequate capital or to find a satisfactory liquidation path for investors, as the IPO market remains tough and merger and acquisition valuations are not high. (NVCA Report)
On the other end of the cycle, venture capital firms raised $ , but again the top 5 firms got 73% of that capital, largely for funds that were investing in AI-related themes. Average investment round value has also risen, again by the need for huge amounts of capital. I am extremely dubious that all these AI-related companies will ever generate enough value to provide a return on the massive amounts of capital being diverted to this industry. Meanwhile other promising businesses are starving for even small amounts of growth capital.
There were about 4600 funding rounds in Q1, at a higher average valuation than in the past, another AI effect. Investors are panicking to not miss the supposed AI gravy train. Despite being a horrible place to do business, California continues to dominate receipt of VC funding, likely because of its historic tech company concentration. Venture debt use declined substantially in the quarter, particularly in health care. Funds still have lots of uncalled capital commitments and new fund-raising has been adequate, but it is very negative that the limited partner investors in these funds are putting in much more capital than is being returned to them. That is not what they sign up for and at some point, if distributions from liquidity events don’t increase, the investors will not have capital to reinvest in new funds, or will be unwilling to invest with such poor returns.
Venture capital is critical to innovation and creation of successful companies that provide good jobs. We are seeing a bifurcation of the market that is not healthy–most companies having difficulty finding capital while a few–almost all linked to AI, get huge proportions of total funding with sketchy likelihood of good returns.
