---
title: "Tech Funding in 2025: The AI Bubble vs. The Infrastructure Boom"
created: 2025-07-22 10:30
author: Maya Osei
keywords: venture capital 2025, AI funding, infrastructure investment, IPO market, tech funding trends
description: H1 2025 funding data shows a bifurcated market — AI application layer funding has cooled while infrastructure investment continues to grow. What the LP perspective reveals.
---

Two narratives are simultaneously true about technology venture capital in the first half of 2025: the AI funding boom is moderating, and infrastructure investment is accelerating. These trends are related, and understanding the relationship between them explains a lot about where the technology industry is heading.

Total venture investment in technology companies in H1 2025 was approximately $89 billion globally, according to PitchBook data. That is 14% below H1 2024's total of $103 billion, but still far above pre-2020 levels. The decline is concentrated in AI application companies; AI infrastructure and developer tools have continued to attract capital at elevated rates.

## The Application Layer Correction

The correction in AI application company valuations has been building since late 2024. The proximate cause is the same one that has historically corrected inflated software valuations: enterprise customers are taking longer to convert from pilots to paying contracts, and the ARR metrics that were used to justify high valuations in 2023-2024 have not been sustained as customers churn out of first-year contracts at unexpectedly high rates.

The median AI application company raised its last round at approximately 25x ARR in 2023. Those companies are now struggling to raise follow-on rounds at those multiples, because investors are applying 2024's harder-earned scepticism to ARR quality. The companies in trouble are those with:

- High customer concentration (top three customers representing more than 50% of ARR)
- Churn rates above 15% annually on an ARR basis
- Products that are wrappers over foundation models without genuine differentiation
- Burn multiples above 2.0x (spending $2 or more to generate each $1 of ARR)

By these criteria, a large fraction of the AI application cohort is facing a difficult fundraising environment. Several well-known companies that raised at unicorn valuations in 2023 have not yet announced follow-on rounds; the absence of news, in this environment, is informative.

## Infrastructure Investment Continues

The infrastructure layer tells a different story. Spending on AI compute, networking, and datacenter capacity remains extraordinary. NVIDIA's revenue has continued to grow, and the cloud providers' capital expenditure on GPU clusters has not shown signs of moderating. The constraint on AI infrastructure investment is not demand — enterprise demand for AI compute remains robust — but the rate at which new hardware can be manufactured and deployed.

The venture investment picture at the infrastructure layer reflects this dynamic. Companies building AI inference infrastructure, specialised AI hardware, and the data pipelines and MLOps tooling that enterprises need to operate AI systems in production are raising rounds at healthy valuations with relatively less valuation compression than the application layer.

The pattern is recognisable from the cloud computing buildout of the 2010s: the infrastructure layer captured durable, growing revenue before the application layer had figured out its business models. AWS became an enormous, profitable business while hundreds of cloud-native application companies struggled with unit economics.

## The IPO Market: Still Frozen, But Thawing

The technology IPO market has been largely frozen since 2022's correction. 2023 and 2024 saw very few significant tech IPOs, as companies with access to private capital preferred to stay private rather than face the scrutiny and short-term pressure of public markets.

In H1 2025, we saw the first tentative signs of thaw. Several mid-sized technology companies filed for IPO or completed listings, testing whether public market investors had re-calibrated their expectations from the froth of 2021. Early results are mixed. Companies with clear profitability paths and strong unit economics have been received reasonably well. Companies without have faced a chilly reception.

The companies most likely to successfully IPO in the next 12-18 months are infrastructure and developer tools companies with strong recurring revenue and clear paths to profitability. Application-layer AI companies are unlikely to have attractive IPO conditions until the churn and ARR quality questions in the sector are more clearly resolved.

## The LP Perspective

The most revealing conversations I had for this piece were with limited partners — the endowments, pension funds, and family offices that fund venture capital funds. LPs have historically been the most accurate leading indicators of VC market conditions, because they are investors in investors: their behaviour predicts what VCs will be able to deploy.

The pattern among LPs in 2025 is a meaningful reduction in new commitments to early-stage generalist venture funds, offset by continued strong interest in growth-stage infrastructure-focused funds and specialised AI infrastructure funds. "We got burned by the 2021 vintage," one endowment manager told me. "Not catastrophically — but the returns are going to be mediocre for a generation of funds that looked like obvious winners in 2022. We're being more selective."

The practical implication: the pool of capital available for early-stage AI application company fundraising has contracted more significantly than the headline numbers suggest, because LP caution flows through to new fund formation, which then flows through to early-stage investment 12-18 months later.

## Which Sectors Are Actually Drying Up

Beyond the AI application layer, several other categories are experiencing meaningful funding contractions:

**Consumer fintech** — the category that produced a wave of neobanks, BNPL services, and financial apps in 2019-2022 — has been in secular decline since interest rates rose. Business models that depended on low-cost capital and high consumer spending have proven fragile.

**SaaS without AI features** — pure workflow management, project tracking, and similar tools without meaningful AI integration are struggling to raise at previous multiples. The bar for "what is distinctive about this product" has been reset by the AI-native competitors entering every software category.

**Web3/crypto-adjacent infrastructure** — after the 2022-2023 shakeout, institutional venture capital has largely abandoned the sector except for the infrastructure layer (custody, compliance tools, institutional trading infrastructure). Consumer-facing crypto products are finding little VC interest.

**No-code and low-code platforms** — the category that was expected to democratise software development in the early 2020s has been significantly disrupted by AI coding tools, which address the same underlying demand more effectively for the use cases that matter most to enterprise buyers.

The bifurcated market will resolve, as bifurcated markets always do, either by the infrastructure investment producing revenue that justifies it, or by a broader reassessment. The evidence currently points more toward the former, but the timeline is uncertain.

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*Maya Osei covers the business of technology and startup funding at TechPulse. Revenue and funding data from PitchBook, CB Insights, and Crunchbase.*
