Emerging Companies & Venture Capital market review: a half-year update

Against this backdrop of global uncertainty, this half-year update draws on Shoosmiths' real experience on VC deals to deliver data-driven insights into the evolving VC deal landscape.

Global shocks are re-shaping 2025 for Venture Capital

The venture capital (VC) landscape in 2025 continues to evolve in response to shifting global dynamics. While the year began with cautious optimism, recent developments, particularly the introduction of higher tariffs in the US, further military action in the Middle East and broader economic volatility, have introduced a renewed sense of uncertainty. These macroeconomic pressures are already having a tangible impact on deal-making and exit strategies, with notable IPO delays and a more measured approach to investment activity.

Tariffs & tension: VC’s mid-year mood

The first half of 2025 has seen a marked increase in investor caution. The imposition of new tariffs in the US has contributed to a more unpredictable global economic environment, prompting many investors to reassess their risk appetite. One of the most visible consequences has been the delay of several high-profile IPOs, including Klarna, as companies wait for more favourable market conditions.

This hesitancy is also reflected in private markets. While VC funds continue to hold significant capital reserves, there is a clear trend towards longer deal timelines and more rigorous due diligence. Investors are prioritising quality over quantity, and the bar for investment readiness has risen accordingly. Although capital remains available, it is being deployed more selectively, with a focus on businesses that can demonstrate resilience and scalability in uncertain conditions.

Deal trends

At Shoosmiths, we continuously analyse deal terms and features to ensure we remain at the forefront of the market. Our extensive dataset—one of the most comprehensive collections of legal terms used in corporate transactions—reflects the breadth of deals we advise on. By combining this proprietary intelligence with leading market reports, we deliver concise, data-driven insights into what lies ahead for the venture capital landscape.

Investor Caution Deepens: more warranties, more watchfulness

Similar to our term trend analysis for 2024, Shoosmiths’ deal data shows that founders are still being asked to provide warranties more often than not - and there has been a slight increase in the number of founder and company warrantors compared to company-only warrantors. This trend indicates that investors are seeking additional assurances from founders, reflecting a cautious approach in the current market environment. Despite these changes, the newly revised BVCA documents maintain the starting position that only the company gives warranties, which could influence future negotiations.

Steady Liquidation Preferences, Shifting Landscape: What will 2025 bring?

Use of non-participating vs participating preferences are still generally in the same proportions as per the previous reference period (with the increased use of participating preferences remaining). This is not unexpected as market conditions have not significantly changed over the last 12 months, though it will be interesting to note how the fluctuating economic and financial landscape of the first quarter of 2025 will impact risk appetite and shape preferences for the rest of the year.

Leaver provisions plateau – but founders face more risk upfront

The upward trend in the use of leaver provisions has stabilised, with the percentage settling in the high 80s. This will not be a surprise as inclusion of leaver provisions has become a standard practice in VC deals. Notably, on a percentage basis, the use of three categories of leaver provisions is almost as common as two categories, reflecting a shift towards more nuanced and flexible arrangements.

In our analysis of Shoosmiths’ 2023 data we observed a significant shift towards two categories of leaver provisions, coupled with a decrease in the percentage of shares at risk on day one. This trend was attributed to founders finding investors less flexible on the types of leaver so instead seeking to reduce the number of shares they were willing to risk initially. However, this trend has reversed, with flexibility in leaver types now coming at the cost of more risk on day one. Despite this shift, the current position is still far from the 2022 scenario, where three categories of leaver provisions were used in the vast majority of deals.

Exits, AI & Dry Powder: What’s driving (or not) VC strategy for the rest of 2025

Strategic exits in focus: As widely reported, there has been a significant decline in exits in recent years. While private equity funds might seek to expedite exits due to extended holding periods, this approach may not necessarily drive significant value. The timing and quality of these exits will be crucial for maintaining value creation.

Sector focus - hype vs. hope: Quantum computing generated significant hype at the end of 2024 and the start of 2025. Could this be the next AI phenomenon? Perhaps not – NVCIDIA CEO, Jensen Huang, put cold water on the sector in January by stating the next developments could take 20 years. Whilst this continues to bubble in the background, we are likely to see applications that utilise AI take a good chunk of the market.

Investment trends – capital in waiting: Reports from EY noted that 2024 was the third largest year on record for VC investment in the US. While VC investment amounts rose, deal volume fell below the 10,000-mark for the year for the first time since 2012. This, alongside further market noise, continues to suggest that many VC funds are currently holding substantial capital, which will need to be deployed eventually. Despite this, deals are taking longer to close, indicating a continued cautiousness among VCs. Consequently, while we anticipate an overall increase in investment activity, there may be heightened competition for the most promising deals and business plans.