The Q3 2025 Venture Paradox

According to the recent Pitchbook data for 3Q 2025^{1, 2}, the US venture capital market in the third quarter of 2025 presented a contradictory picture: a frenetic dealmaking environment driving record-high valuations at early and late stages, all while a pervasive lack of broad-market liquidity continues to challenge investor returns. This environment is chiefly governed by one factor: the relentless, competitive pursuit of Artificial Intelligence (AI) deals.

Valuations Soar on AI Hype

Venture prices have reached historic levels across the board. The median Seed pre-money valuation has climbed to a new high of $16.4 million in Q3 2025, marking an increase of $6.4 million over the 2021 peak quarterly median. Similarly, the median Series A valuation has surpassed the $50 million threshold. This explosion in pricing is most acute in the AI sector, where the median Series A pre-money valuation of $58.8 million is 26.5% higher than the overall market median.

The late-stage market also saw a significant rebound, with the median Series D+ valuation hitting $1 billion, matching the high set in Q4 2021. This resurgence is supported by a significant increase in the median step-up for Series D+ rounds, reaching 1.6x, and a notable decline in the proportion of down rounds to 14.6%—the lowest figure since late 2022.

The Challenge of Paper Gains

Despite the optimism in dealmaking, converting paper gains into cash remains the market’s core structural problem. Recent VC fund vintages, particularly 2019, 2020, and 2021, have underperformed the S&P 500, a result of the high prices paid for companies and the inability for private gains to be realized through exits.

Short-term performance, however, is beginning to stabilize. The VC rolling one-year Internal Rate of Return (IRR) returned to positive territory at 3.1% in Q1 2025, continuing an upward trend for three consecutive quarters. Furthermore, liquidity efficiency is slowly improving, with distributions rising to 12.7% of Net Asset Value (NAV), up from a low of 7.9% in 2023.

A Tenuous Liquidity Outlook

While the IPO market in 2025 has offered some positive signals, market observers expect the full return of liquidity to be delayed until 2026, contingent on projected Federal Reserve rate cuts. The mixed results from Q3’s largest public listings, many of which traded below their first-day close, underscore the fragility of the re-opened window. Meanwhile, the median valuation step-up for acquisitions is a muted 1.4x, a substantial drop from the 2.0x peak of 2021, indicating that exit returns are struggling to keep pace with rising private valuations. The market, therefore, continues to operate on the confidence that today’s high valuations will be justified by a significant wave of liquidity in the near future.

Key Findings on Valuations and Dealmaking:

• Valuations Hit Records: VC valuations reached new median highs across every series.
  • The median Seed pre-money valuation hit a new record of $16.4 million in Q3 2025, which is $6.4 million higher than the highest quarterly median from 2021. The median Seed deal value for 2025 is $3.5 million.
  • The median Series A valuation has surpassed $50 million. The median deal value for Series A in 2025 is $14 million.
  • The median Series D+ valuation reached $1 billion in Q3, matching the Q4 2021 high.

• AI is the Primary Driver: Rising prices and the shift back to founder-friendly terms are driven by intense investor competition for AI companies. The median Series A pre-money valuation for AI companies is $58.8 million, which is 26.5% higher than the overall market median.
• Improved Sentiment: Later-stage optimism is reflected in rising step-ups at Series D+, which reached 1.6x, aligning with pre-2021 levels. Down rounds have declined to 14.6% of total deals, the lowest proportion since late 2022, and the periods between later-stage rounds have shortened.

Key Findings on Returns and Liquidity:

• VC Underperformance: VC fund vintages since 2019 have largely underperformed the S&P 500, with the widest gap seen in the 2021 vintage. This is due to high prices paid, lower markups between rounds, and the inability to convert paper gains into cash distributions.
• Returns Stabilizing: The VC rolling one-year Internal Rate of Return (IRR) was positive at 3.1% as of Q1 2025, marking three consecutive quarters of positive performance¹². However, this is still well below the 12.5% average from 2015–2019.
• Distributions Rising: Distributions have risen to 12.7% of Net Asset Value (NAV), up from a 7.9% trough in 2023, reflecting a gradual return of liquidity.
• Liquidity/Exits: The IPO market in 2025 has provided some positive signs, and a further rebound for IPOs and liquidity is expected in 2026, supported by expected Federal Reserve rate cuts. However, most of Q3’s largest public listings were trading below their first-day close as of September 30. The median valuation step-up for acquisitions is only 1.4x, significantly below the 2x peak recorded in 2021.

References

1. PitchBook & Morgan Stanley. Q3 2025 US VC Valuations and Returns Report. (The main report document).
2. PitchBook. “Quartile deal size x series yr.” Q3_2025_US_VC_Valuations_and_Returns_Preview_XLS.xlsx (Data sheet providing median deal sizes for Seed and Series A rounds)

Disclosure

David H. Crean, Ph.D., is a Managing Partner for Cardiff Advisory LLC, an M&A investment banking strategic advisory firm focused on the Life Sciences and Healthcare sectors. This article is provided for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for or issue any securities.

The principals of Cardiff Advisory LLC are registered representatives of BA Securities, LLC Member FINRA SIPC, located at Four Tower Bridge, 200 Barr Harbor Drive, Suite 400 W. Conshohocken, PA 19428. Cardiff Advisory LLC and BA Securities, LLC are unaffiliated entities. All investment banking services and securities are offered through BA Securities, LLC, Member FINRA SIPC.