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Morgan Stanley Research Global Foundation: Summary

Overview

• Hyperrational

  • The venture capital market in 2025 has continued its rapid growth, with record funding rounds. Analyzing trends in sector allocation, valuation shifts, and company performance.

• Venture Vision

  • Funding Rounds: 2025 marked a continuation of the hypercompetitive fundraising environment, with massive capital flows into AI, GenAI, and other high-growth themes. AI-based companies represent over 55% of US VC investment in 2025 YTD, driven by Al’s high-capital intensity.

• Funding Trends

  • Compared to 2024, 2023, and earlier years, funding rounds have escalated dramatically according to Exhibit 1.
  • AI and machine learning sectors remain dominant, with a broad tail of innovation in both foundational and applied models.

• Market Sentiment Shift

  • The emergence of DeepSeek threatens the market leadership previously held by Western players, suggesting that high infrastructure investment may not be sustainable. However, this may already be partially reflected in valuation adjustments.

• Adoption vs. Enablement

  • Companies that adopt AI (AI Adopters) are outperforming AI Enablers in terms of valuation and investment returns, as shown by Exhibit 4.

Valuation and Funding Data

• Global VC Deal & Valuations

  • Exhibit 3 shows significant shifts in search interest and market positioning between ChatGPT and DeepSeek, indicating a challenge to the earlier AI narrative of Western monopoly.
  • VC valuations continued their rapid escalation through 2024, though there are signs of a correction in early 2025, as noted by the Refinitiv Venture Index (Exhibits 24–28).
  • Regional growth remains strong across North America, Europe, and Asia, with large IPOs and PE-backed deals listed in Exhibits 10–12, such as Smartsheet, Bogart Wealth, and Protective Industrial Products.

• VC Post-Money Valuation Trend

  • The US VC post-money valuations surged YoY compared to the US 10-year yield, though a reversal in momentum is noted in the later part of 2025 (Exhibits 20–22).

Performance Metrics

• VC Returns and Metrics

  • The Rule of 40 analysis (Exhibit 13) shows that a significant portion of venture-backed companies meet or exceed the 40% growth-profit benchmark.
  • Unicorn hunter performance continued to substantially outperform the S&P 500 and Nasdaq (Exhibits 14–16).

• Market Anomalies

  • Significant employee redundancies across startups are detailed in Exhibits 15 and 16, highlighting workforce adjustments in response to slower exits and mergers.

Cross-Asset Comparison & Trends

• Correlation with Broader Markets

  • VC performance, with data from the Refinitiv Venture Index, is closely tracked against broader asset classes (Exhibits 25–28). A modulated pullback in VC valuations was observed in the latter part of 2025.

• VC Allocation Impact

  • The investment landscape is increasingly influenced by government funds, private equity arms, and institutional players (Exhibits 17–19).

Key Challenges

• Market Dynamics
  • The market faces a headwind from potential dampening effects of new players focusing on lower cost AI replication, challenging the historical trajectory of infrastructure spending.

####Concluding Notes

• Morgan Stanley Research continues to track VC funds globally with a focus on thematic investing, highlighting AI, CleanTech, Defense, and the shift toward sustainable exits via merger or public listings.
• The evolving regulatory and economic landscape (especially in China and the US) shapes future potential opportunities.